The comparison of cash bond and CDS indices shows that the real action in corporate credit markets is taking place in the cash bond markets, in both the investment grade and the high yield segments. After Lehman’s default, a heavy selloff in both investment-grade and high yield bonds took place that sent cash bond spread higher than their CDS counterparts (‘basis’ definition = CDS spread – asset swap spread rather than bond spread, but results are similar) in a reversal of fortunes since the start of the credit crisis (see also PAM.) A negative basis used to be common in the good old days when the building up of leverage in structured products required the sale of large amounts of credit protection. The unwinding of these structures instead sent CDS spreads higher than cash bonds during the crisis. Until mid-September.

Going forward, will bond yields eventually converge lower as investors take advantage of distressed prices and arbitrage opportunities (negative basis trade includes buying both a bond and protection on the same to lock in risk-free profit)? Or are bond prices reflecting a fundamentally worse outlook that is not captured in CDS spreads?

It depends on the reasons for the jump in bond spreads. Market commentators offer two explanations:

From Economist Intelligence Unit: Better-quality investment-grade corporate bonds (company bonds rated triple-A to triple-B) suffered negative total returns of more than 7% for a second straight month in October. This is an astounding development. For Merrill Lynch indices dated back to 1989, there had not previously been a loss in excess of 4.25% in any given month, let alone a loss of more than 14% on a two-month basis (see Graph 1)

For high-yield or “junk” bonds (company bonds rated double-B or lower), the loss was more than 16% in October alone, after a more than 8% loss in September. Each, at the time of release, marked a record monthly loss for the category (see Graph 2.)

High-yield specialist Martin Fridson notes that “the high-yield market is entering the up-leg of the default rate cycle with a far worse credit quality mix than the last time around.” In particular, as a percentage of the total high-yield universe, triple-C issues ended October 2008 at about 27% of the total, a record high for the index and up about five percentage points year on year. During the last credit cycle collapse in 2001-02, the triple-C share topped out at less than 25% in the fourth quarter of 2001, presaging the looming default cycle well into 2003.

Graphs 3 and 4 compare the share of low-quality debt (B3 or lower) and defaults in previous cycles. The results are stunning.

Fitch says in a recent report that, including bonds affected by Lehman Brothers’ bankruptcy filing and Washington Mutual Inc.’s collapse, the par value of corporate bond defaults exceeds $100 billion already, a level comparable to 2002 when total default rates reached over 12% (see Altman paper for in-depth analysis.) In October, Fitch warned of the worst default rate on record in this cycle. Currently, high yield spreads imply a default rate of nearly 21% (see Graph 4) while corporate downgrades have been accelerating in Q3 (see also Fitch 2). In other words, what is investment grade today may soon not be anymore as the economy worsens. Moreover, commercial paper funding conditions remain tight.

2) Technical Demand and Supply Factors in the Corporate Bond Markets:

According to Seeking Alpha among the major factors which have caused these steep price drops in the bond markets are the heavy selling volume on behalf of hedge funds and other institutional investors in need to raise cash to meet liquidations requests, margin calls, and deleveraging pressures. An additional factor is sheer risk aversion with investors shifting out of risky assets into safe Treasuries (see Graph below)

So are these firesales indicating the presence of buying opportunities?Mark Kiesel from PIMCO is cautious. “Now, with credit spreads at all-time wides, we are more positive on credit valuations, simply from the standpoint that investors are finally getting paid now to take selective credit risk. Nevertheless, the real effects of the credit crunch will be felt throughout the overall economy over the next year, and near-term deleveraging is likely to continue with near-term negative market technicals with more risky bond sellers than buyers.”

high yield debt does not present a buying opportunity but anything higher in the capital structure is very attractive. look at senior loans trading at similar yields to high yield but with better protection. Sure defaults will be 21% or even more, but senior loans will recover at least 50% of its value. the high yield holder will be left out in the cold just like the equity holder.

Essentially guaranteed is not explicitly guaranteed and the quality of GSE paper will predictably deteriorate (‘litterbin of last resort’.) In my view, as long as the government is not prepared to take GSE paper explicitly onto its balance sheet (i.e. nationalization), the GSE paper will not trade like treasuries. This applies rather to Fannie and Freddie whose ‘conservatorship’ status expires in December 2009 after which point there’s still no solution. I’m less familiar with GNMA though.

Financial News: “Recent defaults of financial companies reached the lowest recovery rates for senior unsecured bonds as established by CDS auction on record: Landsbanki holds record low for senior unsecured debt at 1.25%. Glitnir only slightly better with 3%. Kaupthing recovered 6.6%. Lehman achieved a recovery rate of 8.7% whereas the GSEs secured a recovery rate of over 90% (no technical default.) WaMu secured 57%.” This might actually be an additional reason for IG bond selloffs: If you hold on to a bond you might not recover anything, whereas buying insurance on it is too expensive and/or you can’t be sure you’ll actually get the money.

Not sure I agree with the author’s statement “negative basis trade includes buying both a bond and protection on the same to lock in risk-free profit”, since there seems today to be (considerable?) counterparty risk in buying CDS protection.

Crossed on previous thread by new post:Dr. Roubini, according to “Tech Ticker,” says that “those worried about moral hazard and issues like free enterprise are fighting the last war.”There’s already massive amounts of government intervention in the economy, we’ve [crossed] that bridge,” he says. “The question now is, what are we doing to do right? If it takes an auto czar to really structure these firms, so be it.”So be it, Nouriel? I repeat those brave and determinate words of America’s first well-known naval fighter in the American Revolutionary War as his ship was sinking: “”We have just begun to fight.”Says Ramona Walhof, “The soldiers and the revolutionary army knew that they were fighting for their freedom, for their lives in a very real sense–the kind of lives they wanted to live.”According to the John Paul Jones Cottage Museum, Scotland: “The ‘Serapis’ had superior fire power and Jones had to manoeuvre skilfully to bring his ship alongside and lash her to the ‘Serapis’. During the dreadful 3 1/2 hour fight on a millpond sea, the ‘Alliance’, part of Jones’ squadron, fired at the ‘Bonhomme Richard,’ holing her so badly that she later sank. Over half of the crews of the two ships, including Jones himself, were either killed or wounded and many men were horribly burned. It was during this battle when asked if he wished to surrender that Jones gave the reply “I have not yet begun to fight.” Jones had to transfer his crew to the ‘Serapis’ and together with her sister ship the ‘Pallas’ which had captured the ‘Scarborough’ he sailed to the Texel in Holland with over 500 prisoners…”In 1913 the body of the ‘Father of the American Navy’ was finally laid to rest in a magnificent marble sarcophagus, modeled on the tomb of Napoleon, in the chapel crypt of Annapolis Naval Academy.http://www.jpj.demon.co.uk/jpjlife.htmhttp://www.nfb.org/images/nfb/Publications/fr/fr5/Issue2/f050203.html

Input to Brain trust:High profit growth – does these three words sound familiar to you?Could high profit growth be the problem? Is there something wrong about this Key Performance Indicator which all CEO’s are driving towards?Do the shareholders understand that a constant high profit growth is not sustainable as the resources on Earth are limited? Do the governments care enough?Ask yourself, is your personal KPI high profit growth or do you miss some more dimensions of the KPI.I miss the sustainability factor. The factor should take the environment and the resources on Earth into account and reduces the KPI if the result is not sustainable.Could the Brain trust define the economics behind a sustainability factor?Prosperity = High profit growth X The sustainibility factor????/Toby

When Roubini buy stocks he tried to pass a message to high level of inteligence:1 – I dont care about money.2 – Dont trust me anymore. Im famous, im in siege. My correct words cant be said because te truth causes more losses.

We finally have a definition of what Obama meant by Change – he was talking about light bulbs. This statement was made today and is the centerpiece of his first initiative to get the economy moving and people back to work.“First, we will launch a massive effort to make public buildings more energy-efficient. Our government now pays the highest energy bill in the world. We need to change that. We need to upgrade our federal buildings by replacing old heating systems and installing efficient light bulbs. That won’t just save you, the American taxpayer, billions of dollars each year. It will put people back to work.” Full Text I have a few questions but the most important one is what is the pay scale for a bulb changer? Another question relates to danger pay for handling these new Compact Fluorescent Lights (CFLs) EPA guidelines

Congratulations! You win the Carper and Cynic Award for today.“We finally have a definition of what Obama meant by Change”No, WE don’t; this is just YOUR narrow definition chosen to try to make him look bad in a disarmingly humorous way.“I have a few questions but the most important one is what is the pay scale for a bulb changer?”Whether the pay scale is high or low by your standards is largely irrelevant because this will occur as part of a much larger infrastructure rebuilding program that is designed primarily to create jobs and get more money flowing through the economy. Therefore, theoretically, the more the contractor and his employees get paid the better!

I just inherited a bunch of crappy high yield/high risk closed-end mutual bond funds and a C grade w/junks bonds mutual bond fund. I’m not sure what to do with them. They are paying anywhere btwn 9.21 & 20.84% now and have lost a substantial amount in principal. How can I determine the long and short-term risk of losing all or part of the principal?

NEW THREADWhen Roubini buy stocks he tried to pass a message to high level of inteligence:1 – He dont care about money.2 – Dont trust me anymore. Im famous, im in siege. My correct words cant be said because te truth causes more losses.The best economic brains in the world is here in this forum. The right prediction of the economy means that you predict the primary tendency of the stocks and others assets, this means money and safety to the best of us… We need a brain linker, like Roubini, to cut extremes to make a better prediction. Maybe even Roubini, with nickname not public. With the time we will recognize him or another leader among us… The real truth is not for all, because the real truth make negative influence on the markets and cannot be said by someone famous, unless he seems semi-anonymous.

You have to admit that it is tragically funny that the soon to be leader of the free world puts at the top of his list of key parts of his plan “installing efficient light bulbs” – man oh man are we in big trouble

Thanks much for the link. That is the best and most timely article I have read in weeks. It addresses directly the debate that is raging now between the deflationists and the hyperinflationists. It explains how apparently wildly increasing money supply, monetizing the debt, etc will not necessarily lead to high inflation. It is impossible for anyone to know how much money is enough to avoid deflation, and it implies that the aftereffects will depend on how skillfully Ben or his successor withdraws much of the money they inject into the economy in the coming quarters.It’s a must read for serious students of the current situation.In defense of NR’s relatively moderate view in spite of his still dire outlook for the economy, I think he must believe Ben will largely be successful in keeping deflation from becoming serious and that the stock market will begin to look ahead to the end of the recession and deflation next year.As we know the market is always trying to call a bottom and look ahead. So when the first faint signs of it begin to show up next year, even though the economic news at that time will be worse than now, the market will then begin looking beyond the trough and no further new lows will be made.Therefore, IMO, NR’s call for a further 20% decline, below the previous lows, is reasonable. He has repeatedly called for an 18 to 24 month recession, and we are already 12 months into it. So we know the stock market is going to begin to factor in some kind of recovery within the next 12 months.I.e., it may already be later than we think.

@TobyHigh profit growth or high revenue growth – I have thought for some time one of the biggest factors driving our system toward its downfall is the overall obsession with growth, especially at the corporate level.You have a class of businesses, say your small local business. They are largely content to make their ends meet and serve their community. Next you have the corporate business driven by equity investors. Investors demand high returns (especially in a society with an overlarge financial cestor) hence a drive toward 10% growth at least, every year, or you lose the attention and the money of investors.As more people become a part of the larger corporate system, a larger percentage of the society, the money, the jobs becomes caught up in business operations demanding unsustainable growth. Increasing centralization (mergers that concentrate the financial power in fewer and fewer corporations) widens this effect.Therefore, I think your equation needs another factor,one covering a notion of sustainability tied to decentralization of business and resultant drop in investor demand for unsustainable growth. In other words, localized, sustainable enterprise tied more directly to the welfare of the community, less to the enrichment of the financier.Although I am not a part of the brain trust because their brains are bigger than mine!

“From a post by PeterJBThere are exactly 5% of the population (human) at all times that are potentially individuals and not inclined to join gangs, er, groupings; this is the crucial and critical threshold group for human autopoiesis.”@ OuterBeltway on 2008-12-06 11:28:59You may like the following link for some of my notes on autopoiesis – it is also most interesting that such definitions also are mostly consistent with that of “plasma” – in space (and elsewhere) and which comprise 99.9999% of our Universe, and I suspect, all Universes.http://verbewarp.blogspot.com/2006/09/autopoiesis-naming-universes.htmlThank you for your kind classification of my comment.

Although I know you are trying to emphasize the negative, I am sure you must realize, this is just a small piece of a much larger plan, and perhaps it was mentioned first today just because it is the quickest and easiest to accomplish.From Obama’s address today,“…These are a few parts of the economic recovery plan that I will be rolling out in the coming weeks. When Congress reconvenes in January, I look forward to working with them to pass a plan immediately. We need to act with the urgency this moment demands to save or create at least two and a half million jobs so that the nearly two million Americans who’ve lost them know that they have a future. And that’s exactly what I intend to do as President of the United States.”Calling for smaller government now would be cutting off our nose to spite our face. As in the GD, Government is no longer the problem, it is the solution. The conservatives had their chance for nearly 28 years, so if Reagan, Gingrich, the Bushes, et al didn’t get it reduced to your liking, you can bet the Dems are not going to do it.It is going to be a very looooong eight yeas for you guys. But as we suffered through eight years of W, so shall you suffer. You have my sympathy.Although I know you will not take any comfort in it, this is part of Obama’s agenda for his first 4 years as president:End Wasteful Government Spending: Obama and Biden will stop funding wasteful, obsolete federal government programs that make no financial sense. Obama and Biden have called for an end to subsidies for oil and gas companies that are enjoying record profits, as well as the elimination of subsidies to the private student loan industry which has repeatedly used unethical business practices. Obama and Biden will also tackle wasteful spending in the Medicare program.http://change.gov/agenda/fiscal_agenda/

I would like to add to the above a comment of the difference between intellect and intelligence:Intellect arrives by way of consilience whereasintelligence is expressed in linear fashion founded in the superficial er, commonly known as “Newtonian Sleep”. Seals, monkeys and all other classes of life forms have intelligence abilities.Intellect or consilience, is difficult to express, actually damned near impossible, in the same terms as that of intelligence and needs to be expressed in what appears as odd structures (syntax) or utterances.The foundation of intellect relies on the Laws of Causality, the Laws of Potency and analogy. These 3 primacies are the foundations of Pagan or Royal Science.Intellect is the expression in terms of the ‘verbe’ (the ‘e’ added by me;) – indicated as light – towards the ‘noun’. Lawa of Physics – the Inviolate Laws.Ho hum

Interesting post on another linked blog from this site, an insider view from a derivatives trader:I am a rates derivatives trader in a european bank. just want to say that there are several portfolio insurance type disasters out there happening as we speak that take the level of absurdity to new highs. I have one of them in my book, extremely complex derivative product, sensitive to 2 or more yield curves, long term rates vols and fx vols, basis swaps, all correlations between them, you name it, all in one product. I am sure it will make a beautiful case study in a couple of years to show how absurd things can get, all under the watchful eye of an army of risk managers, mathematicians, and product controllers. These products got so big that they are driving markets they are exposed to against them, and completely controlling the less liquid ones. Nobody has the faintest clue what correlations should be (if everybody is the same way, this is not a statistics question any more), but people take comfort in marking to each other, “implying” correlations from consensus valuations offered by a private company, at which valuations nothing can be traded. In the meantime, everybody is buying high selling low every day big time, to “hedge” these bogus valuations, portfolio insurance style.So, just in case you are looking to expand the number of examples of financial disasters in your book, there is plenty of “new material” out there… under the cover of stochastic differential calculus and other heavy math these products are little more than scams, easy ways to declare profits and pocket bonuses. apologies if you know all these things already. liked your book very much. people won’t listen to anonymous employees like myself (and probably shouldn’t), but will definitely listen to you, so keep going please.Interesting view from the trenches about what it must be like inside the financial industry these days.

From the previous thread in response to a question from Guest on the USD this is OR’s response – I am re-posting here as others may be interested as well (I have a lot of time for someone who got an 11%+ return in 2008 — Thanks ORThanks for the compliment! Lots of things to be worrying about now before one starts worrying about the USD. ECRI’s FIG (future inflation gauge) tells the story.Several links read them all. Deflation/recession, if not worse, taking hold WW. I expect the USD to get close to parity vs. the Euro by mid-2009 or sooner! Forget gold. Too volatile and may be below 500 by mid-2009. I am not an expert in neither precious metals nor currencies. This is my feel from al the stuff I read.http://www.businesscycle.com/news/press/1235/Recession Picking up Speed | December 06, 2008 | PBSWLI Suggests Deepening Recession | December 05, 2008 | ReutersUS Inflation Pressures Fall to 47-Year Low | December 05, 2008 | ReutersEZ FIG hits 33-month low | December 05, 2008 | ReutersIs this Eye of the Storm? | December 05, 2008 | CNBCReply to this comment By OR on 2008-12-06 09:45:25

When will the CEO/TOP excutive ridiculously high pay stop?http://online.barrons.com/article/market_watch.htmlPlanet CEO: Better Than HeavenRising Income Inequality/Pay Disparity At the Top by the National Bureau of Economic Research Digest1050 Mass. Ave., Cambridge, Mass. 02138Dec. 1: In a 2005 study, [NBER authors] Robert Gordon and Ian Dew-Becker found that the top 10% of earners saw their share of overall income rise from 27% in 1966 to 45% in 2001. But fully half of that increase came from relative gains made at the very top of that spectrum, those at the 95th percentile and above. The study also distinguished between “superstars,” whose incomes were market-driven, and chief executive officers, whose incomes were “chosen by peers.”The authors’ new survey carves out a third group: high-income professionals whose pay is market-driven but who don’t enjoy “audience magnification,” whereby superstars can fill arenas or sell recordings to millions — [showing] income inequality growing even among the top 10% of earners, as superstars and CEOs increase their pay faster than lawyers and investment bankers. The pay of superstars, lawyers, and investment bankers is market-driven. CEO pay is not….A study of 1,500 firms found that compensation for the top five officers in 1993-’95 equaled 5% of their firms’ total profits; by 2000-’02, that ratio was 12.8%, [due to] pay decisions by corporate boards and stock-option [awards] to CEOs. … Also, firms “work to disguise the magnitude of CEO pay,” such as lifetime health care and below-market-rate loans…to lessen shareholder outrage; such research… “tells shareholders what to expect and where their outrage constraint should be set.”This skewing of pay at the very top in the U.S. contrasts with Japan. Canada and the U.K. mimicked the U.S., but recent upturns were less dramatic. France has seen the income share of its very top earners stay quite stable since the mid-1940s. Why the disparity? American CEOs have had their pay inflated by generous stock options and set…by peers [plus] there are institutional differences including regulations, unions, and social norms.– Laurent Belsie

So is there any relief in sight? We are joined by a fantastic panel, Peter Schiff the president of Euro Pacific Capital, Lakshman Achuthan is the managing editor of the Economic Cycle Research Institute and Jim Ellis is the assistant managing editor of “Businessweek.” Thanks to all of you for being here.Read transcript:http://edition.cnn.com/TRANSCRIPTS/0812/06/cnnitm.01.html

This is the clearest indication that an upturn is still VERY FAR from being “around the corner” I’ve come across; from the best in the business of recession forecasting:http://www.businesscycle.com/news/press/1241/…Read an excerpt of the transcript below:Soaring Job Losses May Signal Deepening RecessionU.S. employers cut 533,000 jobs in November, the most in 34 years, pushing the unemployment rate to 6.7 percent. Columnist Steven Pearlstein and economist Lakshman Achuthan examine what the new job figures indicate.JIM LEHRER: Ray Suarez has our jobs story.RAY SUAREZ: Today’s job report provided the strongest signs yet of a powerful recession: 500,000 jobs lost in November; 1.2 million lost in the last three months alone.News of the rising unemployment rate, heading towards 7 percent, came amid a steady drumbeat of bad business news. Foreclosures numbers are up again. Nearly 1 in 10 Americans is now at least a month behind or facing foreclosure. And November retail sales were anemic at nearly every level, dropping nearly 3 percent…RAY SUAREZ: We take a closer look now at the job loss news and what it signals about this recession with Lakshman Achuthan, managing director of the Economic Cycle Research Institute, an independent forecasting group; and Steven Pearlstein, an economics columnist for the Washington Post.Lakshman Achuthan, what does that main number, non-farm payrolls dropped by 533,000, tell you about the state of the economy?LAKSHMAN ACHUTHAN, Economic Cycle Research Institute: Well, that in the recent rearview mirror, this economy was falling apart at a faster pace than any time during this year-long recession.That is the key thing here; we’re looking slightly backwards and we are accelerating to the downside. It doesn’t tell us a lot about what we’re going to run into in the next few months. For that, we need to look at forward-looking indicators, which also falling through the floor.RAY SUAREZ: Steven Pearlstein, we also had large numbers of people leaving the workforce all together.STEVEN PEARLSTEIN, The Washington Post: About 600,000 people got discouraged, probably, and left the workforce, or most of them. And we had also nearly as — 400,000 workers who were working part-time, additionally, working part-time last month involuntarily. They would have rather had a full-time job and all they could get was part-time.So if you add up the sort of marginal workers, marginally employed workers, or people who discouraged or people who are underemployed, you’re dealing with a sort of underemployment and unemployment rate of more than 12 percent, according to the Department of Labor.RAY SUAREZ: And how does that mesh with what Lakshman just pointed out of picking up the pace, an accelerating shedding of jobs?STEVEN PEARLSTEIN: The acceleration is something that, in many of these categories, we haven’t seen for 40, 50, 60 years.RAY SUAREZ: So, Lakshman Achuthan, given the numbers as a whole, how come forecasters were so caught off-guard? Many of them, the sort of consensus number was 300,000-plus, 325,000 jobs lost, and they were off by quite a margin.LAKSHMAN ACHUTHAN: Right, right. Forecasters aren’t very good at dealing with recessions. That’s just the way of the whole group of forecasters, nothing personal to anybody.And the second thing I think is that a lot of forecasters are kind of business or Wall Street types, to a large extent, and they’ve been quite impressed by the size of these bailouts, of course, to the financial sector, but also other types of bailouts and rate cuts and pretty much think that must do it, that must solve the problem. Therefore, there will be a recovery just over the horizon.However, of course, the business cycle doesn’t work that way. Once it starts, once a vicious cycle — a business cycle is a vicious cycle, where sales fall, production falls, jobs fall, incomes fall, and then sales pull down. We are in that cycle. It’s revving very fast.And this one is quite nasty, because the home price downturn is making the credit markets not allow all the stimulus to come through to the broad economy. And as we lose more jobs, foreclosures go up, home price goes down, the credit crisis remains.RAY SUAREZ: Forecasters very impressed with the measures, but so far not people who hire people? Are they not impressed with what’s been done so far to create liquidity? What’s — go ahead, Steven.STEVEN PEARLSTEIN: What’s been done has been focused on the financial system and just to try to keep it from freezing up. And a lot of money has been committed, and it has done that. It’s not frozen up any more, but there’s not much lending going on.And part of the problem, whether you’re talking about the financial sector or the real economy, is what economists like to refer to as pushing on a string. If I pull on a string, something at the end of the string, I can pull it along. But if I try to push the string, it doesn’t work very well, as everyone knows.And the problem now is largely psychological. You can give people money, and they’ll save it. You can put money into banks, but they’ll only lend it to people who they think is a real safe risk if the economy gets worse. Well, businesses — well, there aren’t a lot of those.And so one of the problems with stimulus at this point is that there’s a lot of pushing on the string, if you try to do it that way. And that’s why I think what you’re going to see a lot of the conversation shifting is, what can the government do directly to affect mortgages? What can the government directly do to affect employment?Well, what you can do with employment is you can hire people. What you can do with mortgages is you can pay off mortgages or you can give the lender some money so he reduces the principal and the interest payments.So we’re going to have to do that as direct things now, because the channels by which stimulus gets to people are clogged or, as I say, you run into the pushing of the string problem.RAY SUAREZ: Lakshman, is there a degree to which job-cutting can kind of take on a life of its own and go on almost like panic selling, where people shed payroll just because they’re so fearful of what’s coming in the next couple of months?LAKSHMAN ACHUTHAN: Sure. And we will also make an error in pessimism, just the same way we made an error in optimism a few years ago. And we’re in the midst of that now.You’re seeing very large announced layoffs that will feed into the jobs reports in the months ahead, which will also be kind of alarmingly weak. And that is a very — right now, it’s survival of the fittest.You have to batten down the hatches as a business or a household and ride out this recession, and there’s no end in sight. That’s the bad news. The good news is, we can’t see that far.RAY SUAREZ: No end in sight, Steven? We don’t get to the bottom faster when we do this sort of revved-up deceleration of the economy?STEVEN PEARLSTEIN: We will get, actually, there faster. But, you know, I don’t know — you know, fast is a relative term. How about six months of 500,000 jobs a month or 3 million jobs between now — between last month and May and June? That’s quite possible, Ray.RAY SUAREZ: But that doesn’t shorten the recession?STEVEN PEARLSTEIN: No, because — sometimes recessions, you know, I hate — sometimes recessions are sort of fast down and fast up. That’s not going to be this one. Sometimes they’re slow down and slow up.What we’re going to have is a fast down and then a long period of bouncing along the bottom. And that’s because there’s a lot of sort of adjustment to a lot of the imbalances in the global and the U.S. economy that have to be worked out, so we’re going to probably go down fast,
and then we’re going to be on the bottom for a while.RAY SUAREZ: A lot of times, Lakshman, economists come on the program and talk, as you opened, by saying that we were looking in the rearview mirror, looking over our shoulders at November and making judgments about job activity. It’s described as a lagging indicator.Is there a point at which job loss becomes a leading indicator and people stop buying things, start making more restricted economic decisions in their own household, even if no one has lost a job, because so many others are?LAKSHMAN ACHUTHAN: Well, yes, and that actually shows up in the leading indicators. There are sets of leading indicators of the economy that you can monitor quite easily. And there’s even weekly versions that are still accelerating down at the fastest pace on record since 1949.These are key drivers of the cycle, things about confidence, things about job expectations, the housing market, profits growth, productivity, prices. All of these are collectively still moving in the downward direction.And so eventually that will run its course, as Steve suggested. We will have a lot of pent-up demand that will join with prices that are attractive, alongside finally some job growth, as businesses get to a profitable business plan so that they can again begin hiring.But the key here is, if we have a U-shaped or an L-shaped, one of these soft recoveries, that’s likely to be a jobless recovery, which is not going to do much for home prices, which is at the epicenter of everything that ails us.And so we really do need to, even though it’s hard, work on a V-shaped recovery. Otherwise we’re going to be having this discussion for many, many years.RAY SUAREZ: Weren’t the last couple of recoveries, Steven, slow to add jobs, even as business activity picked up?STEVEN PEARLSTEIN: Yes. And that’s because, like this one, they started with an asset bubble, a stock market bubble or a real estate bubble, something like that. So that tends to be the characteristic of that.But they were nowhere near as deep as this, Ray. And that’s — you know, I mean, it’s an order-of-magnitude difference.RAY SUAREZ: Steven Pearlstein, Lakshman Achuthan, thank you both.STEVEN PEARLSTEIN: Thank you.

Gee, Krugman sounds pretty gloomy. Almost more bearish than the Professor! Perhaps he should take blogging mor seriously; and then, a lot of the bears here will move there as the Professor is cooling off:-)http://econvideo.blogspot.com/

Yes, disappointment is an old friend of mine, and I have no doubt he will visit me again in the next four years.As far as apologetics, I will not defend what is wrong, but I believe it is too soon for such judgments. I, for one, will wait until after he is inaugurated.

Pretty good article by Jim Willie, which basically negates the “buying opportunity” mentioned in Nouriel’s article Zombie Banks & Gold Trigger The USGovt and financial system is growing deep commitments to support dead entities. Their business models have failed. They are bankrupt. Although with faulty business model, often laced with fraud, they have been fully adopted by the USGovt and US Federal Reserve. They are considered too big to fail. Or one should say, they are too connected to the power structure, or they are too intertwined with explosive financial devices, or one from their own tribe is running the Dept of Treasury. Capitalism embraces the Darwinian principles bound by survival of the fittest. The United States bears absolutely no resemblance to such principles anymore, at least at the upper corporate echelons. The system is giving colossal support to zombie banks and soon zombie corporations. The Wall Street banks continue to receive money without any restrictions whatsoever, even grants after meetings held before dawn, but Detroit carmakers must produce a plan for reform. Under what conditions did Citigroup receive untold billion$? Did they make concessions, or just pull a string? Hidden motives abound, even for the Citigroup last minute bailout.The climax of this charade in ass-backward policy will be the nationalization of the mortgage system. It is a fully neglected problem, soon to need powerful aid in the nation’s largest program in its history. Its prelude was the adoption of the Fannie Mae & Freddie Mac couple, despite its well-known fraud, perhaps directly due to the desire to cover its fraud. Foreigners like China demanded the USGovt backstop of the fat failed duo, which gave the fraud kings political cover. The many foreign funds would have continued to dump the F&F label bonds en masse without the official takeover. Instead, they have shifted from USAgency Mortgage Bonds to USTreasury Bonds.The US financial structure deeply invests in failure, and is fully committed to the ruling elite, to the exclusion of the mainstream public. Ever since Clinton appointed Robert Rubin of Goldman Sachs to the post of Secy Treasury in 1992, the USEconomy and US financial structure has suffered mortally wounds. That decade of prosperity was stolen from Fort Knox, a major piece to the Strong Dollar Policy having been the gold carry trade enacted by Rubin. These insiders borrowed gold at a lease rate pushed down by Rubin, and bought USTreasury Bonds. Since borrowing costs were the biggest component to business profitability, economic growth ensued. Time revealed the gaping wounds, however. Their actions over eight years resulted in a stock boom and bust, a clear and loud signal at the end of their reign, of a failure soon evident in a wrecked national financial foundation.Read the rest:http://tinyurl.com/6fgvns

Yes, we have a very long way to go indeed to equal the damage inflicted in the GD as cited in the article. And given the actions already taken and those that will be taken in 2009 both here and around the globe, it is hard to imagine a continuing decline in the economy as was seen in the early 1930s.

SCHIFF: “There’s nothing we can do. The government can’t create jobs; they’ll destroy jobs trying to do it. The government doesn’t have any money all they have is a printing press. We need to free markets to create jobs; if the government wants to help they should reduce their burden on the economy. We should be cutting government spending. We should be cutting taxes and we actually should be raising interest rates. We’re doing all of the wrong things and we’re going destroy this economy.”Ask the people who worked for the TVA, the WPA, and other New Deal programs if the government can’t create jobs. Schiff is too ideological to be taken seriously in this environment. He will continue to spout his free-market philosophy despite evidence negating its correctness.And I am getting tired of the old saw that “we borrowed and spent too much money. We’re not going to borrow and spend our way out of it. We have to do the opposite of what we’ve been doing. We’re simply digging ourselves into a deeper hole right now.” That sounds very intuitive but it just isn’t right, IMO. First who is “we”. We borrowed too much, and banks levered too much, but they ARE doing the opposite now. People are borrowing less and saving more, and banks are deleveraging and building up reserves.All the government is trying to do is fill the gap with its (the public’s) money to keep the whole system from collapsing entirely! So we will still have an economy to grow again when the private sector and people get back on their feet, so to speak.Government borrowing is not the same things as consumer and the private sector borrowing, and to make them equivalent is just plain wrong in my mind.

It doesn’t look like we have learnt much from the pain/reached bottom:Can’t Put a Price on HistoryDespite faltering economy, some traveling to Inauguration Day are willing to go to any expense.http://www.washingtonpost.com/wp-dyn/content/article/2008/12/06/AR2008120602094.html?hpid=topnews…Luxury hotel rooms at rates above $1,000 a night are being grabbed like candy from a split piñata. Boutiques are selling out of ball gowns, and tailors are creating custom tuxedos, even before tickets to most balls are being sold. Limousines are being booked, and hairdressers and aestheticians are being reserved at a pace they’ve never seen.”It’s as if we’re not even in a recession,” said Lena Tali, owner of Blackberry Limousines in Sterling, which is renting a “Hummer package” for $1,700 a day, a 10-passenger limousine for $1,400 and a Mercedes S500 package for $1,200 — fuel, taxes and gratuities included. “I’m sure we’ll be booked up for the five days. I’ve got people calling me from all over, even out of state. They aren’t even worried about the prices, because they know it won’t be cheap.” …

Karydakis (an NYU associate of the good professor) argues that this recession will end mid 2009 followed by a slow recovery. He bases his argument primarily on the durations of the 81-82 and 73-75 recessions (16 months each). Comparisons to the GD are dismissed citing significant differences in the banking system and safety nets such as FDIC etc.He explains that his prediction:

“is not based on any particularly refined insight that economic forecasters have into the current recessionary dynamic”

and that

“The predictions about this recession lasting through mid 2009 are mostly based on the following simple calculation … Given that the average length of the ten recessions since World War II has been 10.4 months, with a range of 6 months in the 1980 recession to 16 months in the 1981-82 one, the natural “placeholder” time frame for the end of this recession would appear to be the middle of 2009.”

His rationale for having it end in June 2009 (19 mths) rather than March(16 mths) is based on his assertion that at 12 months old it has not yet approached its trough. He cautions that the damage to the banking system will result in a slow recovery and associated feedback.He concludes on an upbeat note with the following statement:

“…the Fed’s seemingly limitless reserve of innovative actions and the incoming administration’s commitment to put in place a particularly aggressive fiscal stimulus package should gradually gain some traction that will help stabilize the economy within the next three quarters or so.”

In summary, Karydakis argues that the recession will end in mid 2009 because of the limitless reserve of innovative actions from the Fed, the coming stimulus from the next administration and because recessions seldom exceed 16 months.I would think that Bernanke, Geithner and others would also share Karydakis’ perspective. I just wish he would have provided some substance and refined insight to his argument rather than basing it on a simple calculation and a comparison to previous recessions that had different dynamics.

OR,Reading the article and going point by point (this article is pretty standard stuff):- Unemployment is ‘only’ 6.8 percent, and it was 10.4 percent on 1981-2 – remember the Clinton administration changes the way unemployment was reported in 1994, I believe. The number out of the current report that correlates most closely with the old reporting methodology was around 12%.- The article discusses the ‘healing process’ of banks. The deleveraging is less than halfway complete. Home prices are probably still a year from bottom. Banks are still in the process of being torn down. They cannot begin to ‘heal’ for a long time yet.- The article talks about ‘coordinated actions among the major economies to address the root causes of the current episode’. Have I missed something here? This is a giant trade imbalance correcting, exacerbated by unchecked financial innovation leading to a toxic asset mess that is impossible to untangle. It is being treated by throwing unimaginable amounts of money at it to avoid the recognition of insolvency in the financlai industry. There is no transparency. Currency imbalances are destroying EM countries. The only ‘coordinated actions’ I see are rate cute and promises of stimulus. Can someone please point out to me how these actions ‘address the root causes of the current episode’?Bottom line of this authors argument – ‘they are throwing everything they can think of at it, it has to work’.Surely Prof Roubini would not turn upbeat on such shallow arguments.ex VRWC

While most Americans are concerned about their job, food and shelter, auto expenses and utilities, nothing seems to bring out the wealthy elite like another “Got to be there, Par tee”! We can see how serious they are about changing things for the rest of us and must seriously question the accuracy of their bailout pleas. I think it would be quite interesting to see the the names, pictures, yearly income and total assets of each of these people posted in all the media and internet news outlets so that all of us finally understand the ultimate “cry wolf routine”!

I was going to add to my comment above that not having tenure and with Wall Street not hiring, perhaps Karydakis was hoping for a phone call from Benny – talk about sucking up – “the limitless reserve of innovative actions from the Fed”

g, the banks engaged in a very “profitable” business that ultimately made them insolvent. and they grew doing it. bubble.what business will they do, when the bail out money stops, if it ever does, to be as successful or to justify their new found dominance on the economy? there appears to be nothing to replace the old order. ?? where is the triage? maybe comming soon.

It may well be the case that an improvement in the economy could be used to validate Dr. Krugman’s political views, and that if the economy continues to falter, that would not necessarily invalidate those views. That being said, I don’t think he has any “vested interest to talk down the economy.” He is a highly reputable economist who is giving his professional opinion about the current state of affairs. If you disagree with what he says, you should counter his assessment with facts, not speculation on possible underlying motives. One can try to attack the validity of almost anything anyone says on the basis of perceived motive or bias, but most of the time, that just amounts to unfair sniping.SWK

So, where does that leave us? I contacted A. Gary Shilling, the veteran economist and editor of Insight, who has been as prescient on this crisis as media superstar Nouriel Roubini.Shilling predicted the housing bust years ago; said last year that the economy would enter recession in late 2007, and has advocated shorting stocks and buying long-dated U.S. Treasury bonds. Bingo on all counts. (Here is a list of 13 recommendations he made in early 2008.)When I spoke to him this week, he sounded vindicated but hardly cheerful. He still expects the recession to last until the end of 2009, unless the financial problems are even worse than they appear, in which case it could extend “into 2010 and beyond.”He looks for gross domestic product (GDP) to drop by 5% annually early next year and for unemployment to peak at 8% or so. All in all, he expects this to be “the most severe recession in the post-World War II era.” And he thinks housing prices aren’t close to a bottom. The S&P/Case-Shiller Home Price index is down 21% from its 2006 peak. But with at least 1.6 million unsold homes still sitting on the market from the bubble, Shilling thinks prices can fall by another 20% nationwide. “We’re about halfway through,” he says, and he looks for the housing bust to end by the fourth quarter of 2010. Ouch!But most important, Shilling says we’re just beginning the long, painful de-leveraging of the American consumer, who as we all know went on a decades-long, debt-financed buying binge, driving household debt to 117% of personal income and knocking the official savings rate into negative territory.As credit dries up and consumers have no choice but to rebuild their battered household balance sheets, Shilling looks for the savings rate to rise by one percentage point a year for the next decade until it reaches about 10%, where it stood in the early 1980s.The new frugality, he believes, will depress consumer spending, the engine of the U.S. and much of the world’s economy, now at 70% of GDP. It, and other effects of the crisis, could cause GDP growth to drop to 2% a year from the 3% average, a dramatic decline.

k, i agree with your objections but one outcome of his approach would be massive bank failures. we are currently pouring good money? into a black hole. the triage is not happening due to bailout. so ??? my brother asked me if i was in favor of the bailout back in early august i think it was. while a segment of congress was objecting. i thought about it and said no, i am against it. the reason , why finance them further when they have obviously been ruinously irresponsible in the first place.the banks need to be shrunk down and not reinflated. their business model was based on flim flam. no productive business can finance and function under a flim flam usurious system whether it is government or private sector. we don’t have a description of how banks are to make money going forward as apposed to how they made money over the last number of years.? to me, this looks like bankrupcy.

We are beyond the extremes of the 1930s. The frontiers of monetary policy are being pushed to limits that may now test viability of paper currencies and modern central banking.You cannot drop below zero. So what next if the credit markets refuse to thaw? Yes, Japan visited and survived this policy Hell during its lost decade, but that was a local affair in an otherwise booming global economy. It tells us nothing.This time we are all going down together. There is no deus ex machina to lift us out. Certainly not China, which is the most vulnerable of all.As the risk grows, officials at the highest level of the British Government have begun to circulate a six-year-old speech by Ben Bernanke – at the time of its writing, a garrulous kid governor at the US Federal Reserve. Entitled Deflation: Making Sure It Doesn’t Happen Here, it is the manual of guerrilla tactics for defeating slumps by monetary means.“The US government has a technology, called a printing press,Read more

and if there is any doubt that this is a new era – the following should put such notions to rest (and from the NY Times no less):Chrysler’s Friends in High PlacesIn early November, as America’s automakers grasped for a lifeline from Washington, the Treasury secretary, Henry M. Paulson Jr., placed a call to his predecessor, John W. Snow. The topic: Chrysler L.L.C.Chrysler is the smallest of the Big Three automakers, but it stands apart from its peers in another crucial respect. While General Motors and the Ford Motor Company are public corporations, Chrysler is controlled by one of the world’s richest and most secretive private investment companies.That investment company is Mr. Snow’s employer, Cerberus Capital Management, which has used its wealth and deep connections in Washington to shape the debate over the foundering automakers to its advantage.http://www.nytimes.com/2008/12/06/business/06chrysler.html?_r=1

And, could I add, the zenith in hostile merger mania, that allowed a few of America’s well-placed insiders to garner control of a major part of America’s business and production sector through leveraging and stock takeovers, was just being reached (1983 a top year) and our manufacturing base had not yet been massively removed to Third World countries, enabling CEOs and big shareholders to pocket low-labor-cost-induced profits by Congressional decrees allowing them to headquarter in tax havens to avoid US taxes and to export the goods back home tariff free.To ignore this when predicting a recovery is to neutralize any success of the prediction.

WHAT’S THE QUALIFICATIONS OF THIS GOVERNMENT AUTO CSAR?An MBA over engineering develpment? Haha, we tried that in the 90s and it was a complete failure, MBAs don’t have a clue what an engineer does and we want them to manage them?How about an automobile PR sales manager, you know, an MBA skilled in advertising that Americans better start buying from a domestic jobs base [not just low paid globalist factory rats assembling foreign cars either, and I'm talking a jobs base with college professionals working in a home office in America] or watch their country go down the toilet.I’d have the PR Czar in charge of brainwashing Americans away from Tundras and Hummers [we currently average 20 mpg +/- 2 mpg whether we buy Kia or Chrysler], buying Cobalts and Focus instead. Make it a way to fight middle east terrorism by reducing middle east oil use. Hey, we may win the war(s) without soldiers in Afghanistan and jumpstart our horrifying economy at the same time too.You globalist type bloggers got a better plan?

What makes you think that public (or investor) sentiment is at its worst right now? Maybe it could get much worse. Take a look at this comment …”CHICAGO – President-elect Barack Obama braced the country for more tough times Sunday, saying twice in an interview that the nation’s already dismal economy would continue to worsen in the months ahead. “Remember, Mr Obama is hearing from economic advisors that are linked to internal Gov’t figures on the economy. Something to think about.PeteCA

From MarketWatch today (Dec 7′th)”The big number in the coming week arrives Friday (Dec 12′th) with the release of the retail sales report for November. Economists surveyed by MarketWatch are expecting another big drop in seasonally adjusted sales of around 2% after sales plunged 2.8% in October.We’re already braced for bad news. Here’s what we already know:*The chain-store sales index marked its largest decline on record in November;*Auto sales fell to their lowest level in decades; and*Gasoline prices continued to plummet. “Certainly is consistent with what I’m seeing on Main St. I have started hearing from friends who have lost their jobs now. The Cobra plan is getting them through temp health care – but that doesn’t last forever.In addition, my wife commented that several acquaintances have confessed to her recently that they are close to personal bankruptcy. In spite of tighter bankruptcy laws, I expect we’ll see filings start to soar in the next few weeks.The only place that still seems to have a lot of business in In-N-Out Burger. Still lots of customers over there.PeteCA

KJ Foehr quotes Peter Schiff, above: “The government can’t create jobs; they’ll destroy jobs trying to do it. The government doesn’t have any money all they have is a printing press. We need to free markets to create jobs; if the government wants to help they should reduce their burden on the economy. We should be cutting government spending. We should be cutting taxes and we actually should be raising interest rates. We’re doing all of the wrong things and we’re going destroy this economy.”And Foehr rebuts, “Ask the people who worked for the TVA, the WPA, and other New Deal programs if the government can’t create jobs. Schiff is too ideological to be taken seriously in this environment. He will continue to spout his free-market philosophy despite evidence negating its correctness…”I agree with Peter Schiff’s evaluation of the use of public works. And to support my view, I offer an analysis of the question from famed economist Henry Hazlitt:Public works means taxes, says Hazlitt in “Economics in One Lesson”:“There is no more persistent and influential faith in the world today than the faith in government spending. Everywhere government spending is presented as a panacea for all our economic ills…the mother fallacy.“Everything we get, outside of the free gifts of nature, must in some way be paid for. The world is full of so-called economists who in turn are full of schemes for getting something for nothing. They tell us government can spend and spend without taxing at all; that it can continue to pile up debt without ever paying it off, because ‘we owe it to ourselves’ … such pleasant dreams in the past have always been shattered by national insolvency or runaway inflation… all government expenditures must eventually be paid out of the proceeds of taxation; that inflation itself it merely a form, and a particularly vicious form, of taxation.”Hazlitt acknowledges a certain amount of public spending necessary to perform essential government functions and public works to supply essential public services, such as streets and roads and bridges and tunnels, armories and naval yards, buildings to house legislatures, police and fire departments… His concern is public works considered as a means of “providing employment” or adding wealth to the community it would not otherwise have. For instance:“A bridge is built. If it is built to meet an insistent public demand….more necessary to the taxpayers collectively than the things for which they would have individually spent their money…there can be no objection. But a bridge built primarily ‘to provide employment’ is a different kind of bridge…projects have to be invented…plausible reasons why…it soon becomes absolutely essential… it will provide, say, 500 jobs for a year…the implication being jobs that would not otherwise have come into existence…“But if we have trained ourselves to look beyond immediate to secondary consequences, and beyond those who are directly benefited by a government project to others who are indirectly affected, a different picture presents itself.“It is true that a particular group of bridge workers may receive more employment than otherwise. But the bridge has to be paid out of taxes. For every dollar that is spent on the bridge a dollar will be taken away from taxpayers. If the bridge costs $10 million the taxpayers will lose $10 million. They will have that much taken away from them which they would otherwise have spent on the things they needed most.“Therefore, for every public job created by the bridge project a private job has been destroyed on the bridge.” But, the government spenders say, “The bridge exists…the country would have been just that much poorer.”But the ones who can “see in the eye of the imagination” will see the possibilities that have never been allowed…the unbuilt homes, the unmade cars and washing machines, the unmade dresses and coats, perhaps the ungrown and unsold foodstuffs. “To see these uncreated things requires a kind of imagination that not many people have.”Peter Schiff has that kind of imagination.“The jobs destroyed by the taxes for [[public] housing are not seen, nor are the goods and services that were never made.” … Lacking Schiff’s imagination, the government spenders proudly show their friends through the rooms of their public housing and respond, “as a character in Bernard Shaw’s ‘Saint Joan’ replies when told of the theory of Pythagorus that the earth is round and revolves around the sun: ‘What an utter fool! Couldn’t he use his eyes?’”

sniping yes, unfair no – by virtue of his overt political leanings it is only natural to question his motives. To lower expectations as both Krugman and Obama are doing by “talking down the economy” is good politics. I responded to one of his columns some time back – if I can root it out I will re-post.

Regime Uncertainty: Why the Great Depression Lasted So Long and Why Prosperity Resumed after the WarBy Robert Higgs (Austrian School)

Evidence from public opinion polls and corporate bond markets shows that FDR’s policies prevented a robust recovery of long-term private investment by significantly reducing investors’ confidence in the durability of private property rights. Not until the New Deal/war economy ended and resources became available for peacetime production did private investment—and the nation’s economic health—fully recover.Read more (PDF)

Exerpt from KITCHEN CUTBACKS in today’s San Francisco Chronicle:Bay Area waiters have a nickname for many of their customers these days: the non’trée.Non’trée (pronounced “non-tray”) refers to the folks who order appetizers rather than a pricier entree – a popular practice in economic hard times. In fact, as the value of real estate plummets, the stock market totters and the jobless rate grows, diners are sharing meals, skipping dessert, opting to drown their sorrows in a glass of wine rather than ordering a whole bottle, or staying home altogether.Not since 9/11 have Bay Area restaurants, whether it be the fancy, white-tablecloth ones or the cozy neighborhood hangouts, seen such a lull in business. But this time, restaurant owners say, it’s worse. Even in an area known for its obsession with food, some restaurants say revenue is down as much as 40 percent.Many restaurateurs are laying off workers; others reducing the days they are open. Then there are those who are just plain calling it quits.”Maybe restaurateurs should ask for a bailout – more people in the Bay Area eat at Pasta Pomodoro than drive Fords,” said Adriano Paganini, founder of the California bargain pasta chain.But restaurant losses could be the consumer’s gain. Owners, scrambling to save their businesses, are offering all kinds of deals, trying to make eating out too good to pass up.Clark Wolf, a national restaurant consultant with offices in New York and in the Wine Country, said restaurateurs have been known to cry poverty, “but this time it’s really true,” adding that across the country he’s seen sales down from 10 to 40 percent.Making matters worse, he said, “restaurants have spent the year paying for fuel supplements and the rise in wheat and butter prices. While gas prices have dropped, the cost of goods hasn’t…”In these times, people want to know what they’re getting and how much it costs. It makes them feel in control, unlike the stock market.”http://www.sfchronicle.us/c/a/2008/12/06/MN0J14IDRA.DTL

You should be part of the brains trust;It’s a very important point you make (re; perpetual growth); that one of the underpinnings of our economic system is a logical impossibility.”. . . decentralization of business and resultant drop in investor demand for unsustainable growth. In other words, localized, sustainable enterprise tied more directly to the welfare of the community, less to the enrichment of the financier.@===> I also think this is a excellent suggestion. I had not previously though much about the negative effects investor damands could have.

It’s political suicide for Mr Obama to ignore the joblessness situation. He has to respond. Furthermore, we will see enormous suffering if people can’t earn any wage at all. So I’m not opposed to his program – it’s basically a New Deal program.But the USA is going through the start of an enormous re-structuring, accompanied by a loss of living standards for most Americans. It will be very hard for the Obama administration to generate the kind of high-paying jobs that last over the long term. They can generate low income jobs – and that’s not a bad thing – but the risk is that as soon as they drop their jobs stimulus then a lot of those jobs are lost again in the future.Everybody’s gambling on this being the same kind of recovery as previous recessions. I doubt that’s true. During the 2002-2005 period, the recovery after the 2001 recession was known as the “jobless recovery”. We just have not seen the same increase in real wages for Americans, and not the number of jobs that we needed. Instead, Wall Street went on a binge to become over-leveraged, and the financial/banking sectors sucked in a lot of the money. It did not get re-invested into longterm productivity improvement in the US economy. That’s why we’re now looking at a re-structuring that’s much worse.PeteCA

Retail sales slide: San Francisco Chronicle “Bleak November sales portend a horrible season” | Dec 5Most retailers report that sales declined for the month of November compared with this time last year:Abercrombie & Fitch –28.0%Costco –5.0%Gap –10.0%Kohl’s –17.0%Macy’s –13.3%Neiman Marcus –11.9%Nordstrom –15.9%Target –10.4%TJX Cos. –6.0%Wal-Mart +3.4% — Source “Companies”: Compares sales at store open at least a year with November 2007.“Heavy discounts lured consumers to malls and shops on what’s dubbed Black Friday, generating reports of sales increases both nationally and locally. But that couldn’t offset what was overall a disappointing month, exacerbated by early holiday promotions that cut into profit margins along with a late Thanksgiving that shortens the shopping period.”

Thank you, your comment is appreciate knowing that someone finds interest in my notes. The web-site is basic as really I have little time to get into a better and more efficient presentation. One day perhaps but I still need to work. The plan is that one day all these notes will be expanded after the induction processes are complete. In the meantime I post here and think.thanks again.

The New York Times “Luxury Prices Are Falling; the Sky, Too”: Dec. 4″The world is a strange place right now,” a salesman on the main floor at Bergdorf Goodman said as shoppers pawed through handbags piled on counters like discount merchandise at Century 21. “It’s off its axis.”The handbags, like a lot else at the Fifth Avenue retailer, had been marked down 40 percent and are likely to go lower as seasonal sale days wear on. “Sixty percent off is the new black,” as Patricia Marx wryly noted in the Dec. 8 issue of The New Yorker. Yet the discounts at Bergdorf are far from the deepest among luxury retailers around the city.In a move that caused consternation among its high-toned competitors along Fifth Avenue, Saks slashed the bulk of its fall fashion and accessories up to 70 percent over Thanksgiving weekend — to what some termed limbo lows.There is nothing new about retailers cutting prices at holiday time, and the discounts have been especially deep in this recessionary year. But few in the luxury goods trade can recall a time when the price-slashing started so soon or was so severe. By cutting prices radically, Saks’s chief merchant, Ron Frasch, turned his chain’s flagship emporium into a swank Fifth Avenue version of a discount outlet, moving merchandise in volume and spooking the competition as it struggled to hold on to a traditional mark-down sequence, and even to continue selling certain brands at full price. Frasch declined to comment on his corporate game plan. “It’s not a conversation I want to get into,” he said.Even seasoned bargain hunters were startled to see Saks’s wood-paneled main sales floor mobbed with consumers nosing like truffle hounds through shelves of marked-down cashmere sweaters and racks of designer clothes with prices seemingly too good to be true.Could those columnar Valentino evening dresses in signature red really be 70 percent below the original price of $2,950?Was one reading the $329 tag right on a cashmere men’s blazer from the elite Italian woolen house Loro Piana, a jacket that typically costs $2,000 or more? What about the $129 price for a black satin skirt from Comme des Garçons? Was the tagged price a misprint? It was not…The Saks strategy may be the first sign of a radical reconfiguration of the luxury goods landscape, said Beth Buccini, an owner of Kirna Zabête, the SoHo specialty store. “The intense and early discounting will negate the power of runway shows to drive fashion in both creative and commercial terms,” Buccini said. “All anyone can afford to do anymore is to sell pre-collections,” she added, referring to the commercial collections designers offer during transitional periods between their statement-making, twice yearly runway shows.”Runway clothes next year will arrive in the store in April, and we will have three weeks to sell them at full price before the department stores have put them on sale,” she said. “What I’m worried about is the creativity. Everybody is paralyzed wondering what people want, what they’re willing to spend, what’s going to dazzle us into not being able to live without certain items.” It could be, as Zac Posen remarked on Tuesday, that we are headed into a period when designers and retailers are “either stimulated and excited and challenged,” or else follow thousands of other failed American businesses into oblivion.”It’s all going to be very Darwinian,” Buccini said.

Investing in autombile transportation infrastructure is a waste as well. While demand has decreased in the short term, the depletion of ghandwar and cantral are going to mean higher gas costs. We should be investing in rail freight and passenger transportation. Amtrack would be an embarassment in post-soviet sattelite. Supersteel, which manufactures and re-furbishes rail cars has closed up shop in the North East. We are going to have to triage what parts of our infrastructure we want to keep – what suburban developments, what water and sewer mains, what bridges, what highways, what rail lines. We cant keep it all now.

In the Robert Higgs excerpt/link that I posted above he also speaks of the New Deal here is an excerpt:

I shall argue further that the insufficiency of private investment from 1935 through 1940 reflected a pervasive uncertainty among investors about the security of their property rights in their capital and its prospective returns.This uncertainty arose, especially though not exclusively, from the character of federal government actions and the nature of the Roosevelt administrationduring the so-called Second New Deal from 1935 to 1940. Starting in 1940the makeup of FDR’s administration changed substantially as probusinessmen began to replace dedicated New Dealers in many positions, includingmost of the offices of high authority in the war-command economy. Congressionalchanges in the elections from 1938 onward reinforced the movementaway from the New Deal, strengthening the so-called Conservative Coalition.

There’s no point in them even using currency in Zim – except I suppose that they get paid wages in this fictitious money. That country is going to collapse. They may as well trade directly in goods … one bottle of milk = 2 loaves of bread. Or something like that. It’s a terrible situation.Although the Austrian economists have been bashed a lot lately (esp. by those in control who advocate a monetarist solution to these global financial problems), it looks very much like the Austrian theories are closest to the mark right now. All the world’s currencies do appear to be in a downward spiral to the bottom – just as the Austrian school said would happen.In this situation, the losers are the nations whose economies are the first to completely collapse. Along those lines, Chinese representatives said last week that they were preparing for a “worst-case economic scenario” as one possible option.This will also spiral into a fight for political order and control – as growing numbers of people become jobless and homeless.PeteCA

Basically, the economy is based on using resources and labor to produce products that people want and are willing to pay for. If you deviate from that, then you begin to subtract from the proceeds of labor. In other words, when you create products that people don’t want, they are paid for by taxes.Big gargantuan government that for the last 60 years has been consistently pushed primarily by the Democrat Party has transferred money from productive enterprises to non-productive enterprises. The New Deal was the kick start for this era of Big Government waste. Beginning with the Clinton Administration, the tremendous influence on bringing in foreign workers as potential Democrat voters and the beginning of transferring jobs overseas have reduced the effectiveness of unions and higher education and now, supported heavily by Republican administrations, have developed a Quisling corporate culture where high paying jobs are becoming more and more scarce for the American people.Roosevelt’s “New Deal,” while it failed economically did give rise to the modern welfare-warfare state. Its final goal, which it accomplished in the end, was to transfer power, in the form of capital, from the private sector to the government. We are now in the middle of the last act. The New Deal denounced what it called the “fetish of solvency” because, as Garet Garrett said in the 1930s, it “embraced a progressive redistribution of wealth by will of government until there is no more fat to divide; after that comes a level rationing of the national income.”When it failed to convince the American people of its double bookkeeping methods and philosophy of an unbalanced special “emergency” budget, it switched to Paulson’s method of what Garrett calls “the investment state.” As Justin Raimondo put it: “Instead of being awash in debt, the American people – or so they were told—were really awash in ‘investments.’”The middle class [and capitalism], said Garett, was to be “murdered in its sleep.”In “The Green Pastures,” deLawd said “that when you have passed a miracle you have to pass another one to take care of it, so it was with the New Deal. Every miracle it passed, whether it went right or wrong, had one result. Executive power over the social and economic life of the nation was increased.”As China begins to grow its economy with the roots of capitalism that America has uprooted, the American people will have to fight if they want back their Republic – and pay the price. Another “new deal” only takes us farther down Hayek’s “road to serfdom.”

Small town out west with a general store with little to no business, a hotel down the street and a few houses on the outskirts besides a blacksmith, wire office and sheriff. Ocasionally the saloon gets crowded but nary too often. One day a gentleman from the east coast comes out of the hotel to have a drink at the saloon. Word was that there’s a railroad coming our way and this man is offering top dollar for land tracts. People will need some place to eat while the next train comes through so maybe someone will open a restaurant. This train will be well built, cost efficient and it will get us where we need to be. Always, in the greatest darkness of slumps of business cycles upward movements prove themselves evident, failures turn to successes and those who never lose sight of this invest wisely.

Dominic’s end game (Manulife / John Hancock)The above link is an interesting article about North America’s biggest life insurer (based in Canada) and their on going problem with capital vis a vis variable annuities / segregated funds. After the Canadian regulations on captal requirementswere relaxed at the end of October, its share price jumped from $16.55 on Oct 27 to $20.66 two days later. Even with that Manulife had to go to the market on December 2 with a $2.1B offering. Its share price drifted to under $15 by Friday Dec 5 but closed over $16 with Friday’s announcement of a potential modification to capital requirements in the US.The Insurance group jumped 14% Friday on the news of the modification – one has to wonder not only how this can be accomplished with insurance being State regulated but if it will be sufficient – it certainly wasn’t for Manulife.

As many as a million American jobs could be lost every month by next spring as businesses struggle to raise capital in financial markets consumed by fear, according to a new analysis.November was the worst month in the US labour market since the oil crisis of 1974, as more than 500,000 US workers were laid off, according to official figures released on Friday.But Graham Turner, of consultancy GFC Economics, says the rising cost of corporate debt is now flashing a red warning signal that far worse is to come over the next few months and job losses are heading for levels last seen in the 1930s Great Depression.Corporate bond yields have rocketed since the credit crisis began as investors flee risky assets in search of safe havens such as US Treasuries. That effectively means many firms are being forced to pay eye-watering interest rates to borrow funds.Turner says when the gap between the yield on high-risk company bonds and US Treasuries widens sharply, unemployment tends to shoot up – and current credit conditions are pointing to a doubling in the pace of layoffs, to more than a million workers a month, by spring.’The correlation is holding up all too well,’ he said. ‘It’s very disconcerting.’ He added that the pace of layoffs already happening in the US ‘is indicative of panic’. During the 1970s oil crisis the panic was relatively short-lived, he says. ‘But the worry now is that this will just roll on and on.’On Friday alone, embattled car firm General Motors, fund manager Legg Mason, and motor parts supplier Gentex announced plans to shed staff.November’s jobs figures were so much worse than analysts had expected that the Dow Jones share index actually rallied by 259 points, more than 3 per cent, as investors bet that Washington would have to launch a major new rescue package for the economy even before President-elect Barack Obama takes over the White House in January.The scale of the layoffs in the US, which pushed unemployment to 6.7 per cent, could also point towards a further deterioration in conditions in the UK: David Blanchflower, an independent member of the Bank of England’s Monetary Policy Committee and labour market specialist, warned recently: ‘What happens in the US tends to be repeated six to nine months later in Britain’.David Frost, director-general of the British Chambers of Commerce, believes Britain’s companies are gearing up for large-scale layoffs.’There will be a huge raft of redundancies. I am sensing that talking to firms. The worry is that next year the job losses will be just horrendous. All sectors are taking the hit. In the middle of the year it was construction and estate agencies. Now it is services, the automotive industry, retailers. Firms are waiting for Christmas and if they can’t see any improvement they will cut their payrolls.’http://www.guardian.co.uk/business/2008/dec/07/recession-job-losses

“Big gargantuan government that for the last 60 years has been consistently pushed primarily by the Democrat Party”Can you say black is white any more strongly? Look at the time since the GD. The biggest busters of the budget were W. Bush and Reagan. The next biggest was H.W. Bush. The disconnect between reality and what you are saying is stunning. You are purely ideologically driven and the facts be damned.

Why so big business can pay them $8 dollars an hour an cause a complete collapse of aggregate demand and our economy? I’m all for getting rid of big government the day we get rid of monopolistic, behemoth, bureaucratic, political and financially dominating businesses that crush the voice of workers. But I’ll bet you speak out of both sides of your mouth don’t you?

IMHO, the irony is that we haven’t seen the real Black Swan event yet. That’s still coming. The events to date are all a natural series of consequences from economic mistakes in the past. Basic flow and ebb of the Debt Cycle (albeit with enormous magnitudes). The problem is that the Credit Crisis has now morphed into serious political risks for many countries. So the real Black Swan still stalks us.PeteCA

To continue this debate is pointless; the free-marketeers have already lost it. They built the freest market we have had since the 1920s and it has collapsed colossally! Now one by one they have turned to the government for help, unable to survive in the free-market they worked so hard to create since the Reagan Revolution began. Ben, Hank, W, all have embraced bailouts, government loans, government takeover of previously private corporations, and fiscal stimulus to citizens. And they are certainly not socialistic Democrats, they are free-market, conservative Republicans, and they have changed because their way has failed!The banks and the automakers have also turned to the government. Even Greenspan has admitted mistakes,”I made a mistake in presuming that the self-interests of organisations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms,” said Greenspan.A long-time cheerleader for deregulation, Greenspan admitted to a congressional committee yesterday that he had been “partially wrong” in his hands-off approach towards the banking industry and that the credit crunch had left him in a state of shocked disbelief. “I have found a flaw,” said Greenspan, referring to his economic philosophy.http://www.guardian.co.uk/business/2008/oct/24/economics-creditcrunch-federal-reserve-greenspanNow you want to let it all collapse into unpredictable levels of suffering for families and possible civil unrest, even chaos, in the theoretical hope that the invisible hand of the free-market will restore us to prosperity faster than if the government steps in to help. What proof have you?Well that invisible hand has given us the finger, and now who is going to help those out of a job and losing their home, GM? Citigroup? GE? Or the federal government?Who fought to have Glass-Steagal repealed and to have the SEC to allow banks and other financial institutions to lever up more, the government or corporations?Who moved manufacturing plant overseas and outsourced as many good paying jobs as they could, the government or corporations?Who wrote the subprime mortgages; who sold the CDOs, CDSs, and all the other derivatives and financially engineered products, the government or corporations?And you can’t blame the government for not doing its job in oversight either; you don’t want any government interference to begin with, that would just further negate your argument.Everyone turns to the government when bad things happen: 9/11, Katrina, the GD, the financial collapse of 2008. That is what the government is supposed to do — to help and protect the people.Do you think the parents who are facing foreclosure or who have lost their jobs and are worried about providing food or shelter for their children and themselves give a damn if they are working for AT&T or for the federal government in some temporary infrastructure rebuilding job?It’s not about philosophy now; it’s about minimizing pain in families and about stopping the hemorrhaging of our entire economic system so that it can survive the aftermath of the 28 year reign of rapacious capitalism.The idea that government made / is making the problem worse remains unproven, so like Santa Claus or the Tooth Fairy, you can choose to believe in it, but that doesn’t make it true.Where would the stock market be now if the government hadn’t bailed out the banks, and allowed the big 3 to collapse? Where would the banking system be? How much worse would the credit crisis be now? Where would the unemployment rate be heading or already at if they had not taken the “socialistic” actions they have taken so far? And you say this is hurting not helping the situation? Perhaps the New Deal came too late in the GD, but, IMO, to say the government actions taken so far in this crisis are hurting the economy is to misunderstand how much worse it could have become by now if they hadn’t.

The current economic/political environment is like a cold front hitting summer air in tornado alley. The conditions are right for a F5 tornado, but predicting where and when it will strike is impossible. Taleb, based on his theory of chaos and risk, is terrified. He claims he has trouble sleeping at night.Dont go far from your tornado cellar. You don’t want to be caught outside when it hits.

Perception of risk and value has changed, permanently. The securities that were sold by America have turned out to be worthless. The manufactured wealth that they supported has disappeared. America will be known as the country that ripped off the world. Investors everywhere will shun American financial products, and look closely at the ones they have. More fraud will be found. We have seen only the tip of the iceberg so far. This is just the beginning.We packed up our manufacturing infrastructure and shipped it overseas in the name of globalism. Then we had an army of lawyers and actuaries and MBA’s make worthless paper and trick the rest of the world into buying it. You think they will want our paper anymore? Our green federal reserve notes? Look at the holdings of the Federal Reserve. If foreigners wanted to by the worthless assets, they could. Now the dollar is becoming backed by them. We will wish we still had our factories and people who knew how to run them, instead of lawyers and actuaries and MBA’s. How will we buy what we need when the dollar is not accepted for goods around the world, since we no longer make it ourselves? The DOD contractors don’t even make bullets in the US anymore! We hardly make a single thing we need to survive in this country anymore. This is going to be a disaster.The government is ruining the dollar to save the banks, and it will ruin us all.

g,.First, we have no economic health to return to. we have bubble creation economics to return to. where is the new bubble and can that be counted as a recovery?. for some few only..the new deal and war economy should never be connected by a ‘/’. any conflation of the two will suffer from over generalization and will lend itself to ideological and illogical conclusions. imo.regime uncertainty. yes. i would like to compare investment levels in nazi germany for the same time periods. 1929-1950.some investors bridged the philosophical divide so to speak.hedged you might say, lots of big money hedging. on the sidelines while government does the risky spending, lending,and the people supply the labor and war dead body count.see history of standard oil and germany ….http://reformed-theology.org/html/books/wall_street/chapter_04.htm..Standard Oil Fuels World War II..The Standard Oil group of companies, in which the Rockefeller family owned a one-quarter (and controlling) interest,1 was of critical assistance in helping Nazi Germany prepare for World War II. This assistance in military preparation came about because Germany’s relatively insignificant supplies of crude petroleum were quite insufficient for modern mechanized warfare; in 1934 for instance about 85 percent of German finished petroleum products were import…The solution adopted by Nazi Germany was to manufacture synthetic gasoline from its plentiful domestic coal supplies. It was the hydrogenation process of producing synthetic gasoline and iso-octane properties in gasoline that enabled Germany to go to war in 1940 — and this hydrogenation process was developed and financed by the Standard Oil laboratories in the United States in partnership with I.G. Farben…and it was worse …..also.. there was a plot for a faction on wall street to take over the country, see smedley butler, “war is a racket”. he describes being approached by a group of uncertain investors on wall st. to lead the u.s. army/marines to take control of the country and he testified before congress to this fact.so… regime uncertainty? yes, who is calling the shots?the people or the international investor and what impact can each party bring to the table?currently, the implication seems to be that the banks are being propped up for some future function, or, their collapse is being timed for some future and present private gain, beneficiaries unknown.the recovery of investment and economic health referred to above needs further exploration. the tremendous benefit of public investment during the depression and war effort must be seen as setting the stage for a “recovery”, by developing an industrial workforce, innovation, supply lines and relationships etc…..the Austrian school and their analysis strikes me as fascistic and willfully ignorant while attempting to appear philosophically egalitarian and thorough. but i am certainly no expert. public risk and loss for the sake of private opportunity or socialized risk to protect private profit is nothing more than fascism. who is public? labor. who is private? owner,investor?so that is the health of the system. are we to recover to a system where the investor is the 1-5% and the public is the 95% of the population with the majority of the 1-5% being internationalists?to me it is obvious that investment declined in the u.s. from 1941-1944, not because of government spending, but because investors could not determine the outcome of the war.if germany won, they would invest there primarily. if the u.s. and allies won the money would go there. money has no loyalty, no national boundary, and no soul. that is what the central banks facilitate. a structure can only realize it’s own function. from pjp, universal principles…..yet structures can and do exhibit plasticity manifesting unimagined potential effect..http://en.wikipedia.org/wiki/Business_Plot..The Business Plot (also the Plot Against FDR and the White House Putsch) was a political conspiracy in 1933 wherein wealthy businessmen and corporations plotted a coup d’état to overthrow United States President Franklin D. Roosevelt. In 1934, the Business Plot was publicly revealed by retired Marine Corps Major General Smedley Butler testifying to the McCormack-Dickstein Congressional Committee. [1] In his testimony, Butler claimed that a group of men had approached him as part of a plot to overthrow Roosevelt in a military coup….http://www.lexrex.com/enlightened/articles/warisaracket.htm.by idealizing investment and granting it causal status with regard to post war prosperity i think robert higgs misses the heart of the economic and political matter concerning post world war II industrialization. the story is infinitely more dynamic and complex and his conclusion is in part ideological speculation. cool graphs and charts though..the first sentence of this conclusion…..It is time for economists and historians to take seriously the hypothesis that theNew Deal prolonged the Great Depression by creating an extraordinarily highdegree of regime uncertainty in the minds of investors…these “investors” were weary of a system that brought about the crash of 1929 and all the corruption and speculation. they also, imo, detested the spirit of the constitution of the u.s.a. as far as it provides protections for “the people” by assigning congress ……Section 8. The Congress shall have power to lay and collect taxes, duties, imposts and excises, to pay the debts and provide for the common defense and general welfare of the United States; but all duties, imposts and excises shall be uniform throughout the United States;To borrow money on the credit of the United States;To regulate commerce with foreign nations, and among the several states, and with the Indian tribes;To establish a uniform rule of naturalization, and uniform laws on the subject of bankruptcies throughout the United States;To coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures;To provide for the punishment of counterfeiting the securities and current coin of the United States;….. etc…..he should add that the new deal also was instrumental and fundamental to the prosperity that followed the end of the war..but…if you were sighting his study to suggest something more subtle i may have missed you’re thread though i can see a few may be out there..CHAPTER FOUR, from “war is a racket” smedley butlerHOW TO SMASH THIS RACKET!WELL, it’s a racket, all right.A few profit – and the many pay. But there is a way to stop it. You can’t end it by disarmament conferences. You can’t eliminate it by peace parleys at Geneva. Well-meaning but impractical groups can’t wipe it out by resolutions. It can be smashed effectively only by taking the profit out of war.

Guest, in rebutting the comment “Big gargantuan government that for the last 60 years has been consistently pushed primarily by the Democrat Party,” wrote:”Can you say black is white any more strongly? Look at the time since the GD. The biggest busters of the budget were W. Bush and Reagan. The next biggest was H.W. Bush. The disconnect between reality and what you are saying is stunning. You are purely ideologically driven and the facts be damned.”The point is, you can’t equate big budgets with big government.The Wall Street Journal wrote on November 5, 2008: The Democratic gains represented the final repudiation of the Republican revolution of 1994 [voted in during the Clinton years]… THE RESULTS RETURN THE BALANCE OF POWER THAT PREVAILED ON CAPITAL HILL FOR MUCH OF THE 20TH CENTURY, when Democratic-controlled Congresses were the launching pad for Social Security, the modern social safety net and civil-rights legislation.“Democratic leaders have an agenda that harks back to that era, with plans to give government a bigger role in guiding the economy and to strengthen the ability of labor unions to organize in the workplace. They also aim to expand health-insurance coverage and push through a sweeping bill to curb greenhouse-gas emissions.“’This is a tectonic-plate election, one of those once-in-a-generation times where people not only define change, but define a new relationship with government,’ said New York Sen. Charles Schumer, the lead campaign strategist for Senate Democrats. He added that voters want a government that is “more activist, more involved” in the economy and their lives…”As you can see, a budget used as a barometer of big government is misleading: the congresses set the programs into law. The welfare state unarguably is a Democrat emphasis; the mechanisms for the welfare state were put into place by Democrat congresses and Democrat judges (who instead of interpreting the law made law)… The mechanisms for massive environmental costs, massive health care costs, affirmative action costs, big bureaucratic education costs, OSHA costs, noncompetitive labor costs, big bureaucracy costs… these are the frameworks that cost American business and taxpayers more and more every year—totals which are not necessarily reflected in the budgets of the Federal government.For instance, where in the Federal budget does it show the business expense of putting in special restrooms, elevators, parking, sidewalks, et cetera, throughout the U.S… or all the massive regulations on commerce, transportation, communications, retail and small businesses of every kind? You say, well that’s good: that you like it. Well, then, your idea of reform meshes with that of the Democrats, i.e., to control capitalism.It is the Democrats who work constantly to transfer wealth and control to government from business. Do you remember Hillary Clinton’s school to work program?In testimony on the “School to Work; Goals 2000; Outcome Based Education” by the HON. HENRY HYDE in the House of Representatives on MAY 15, 1997, Rep. Hyde quoted Dr. D.L. Cuddy, a former senior associate with the U.S. Department of Education:“With `School-to-Work’ (STW) legislation (H.R. 1617/S. 143) soon going to conference committee in Congress, it’s important to look at the background of this concept.Plank 10 of Marx’s Communist Manifesto provides for a `combination of education with industrial production,’ and in 1913 when Stalin was having difficulty getting his Marxist cadres into key positions for the `class struggle,’ he described a `regionalism’ strategy (e.g., NAFTA, later) against nationalism and used the slogan `workers of the world unite.’“Self-described American communist Scott Nearing in The Next Step (1922) described how a world economic organization (e.g., GATT and the World Trade Organization, later) would be the first step toward world government, but first in The New Education (1915) he applauded `breaking away from the 3 R’s and Cincinnati’s `half time in shop, half time in school ‘ system…“By 1970, Americans were coming to be thought of as `human capital’ (note Lester Thurow’s 1970 book, Investment in Human Capital), and in 1971 UNESCO’S Secretariat asked George Parkyn to `outline a possible model’ for an education system that resulted in Towards a Conceptual Model of Life-Long Education describing how students would choose a vocational field and work part time, and receive `certificates’ of educational attainment.“Two years later, Michael Lerner (who would become an important advisor to Hillary Clinton) wrote The New Socialist Revolution, proclaiming: `Education will be radically transformed in our socialist community … the main emphasis will be on learning how to … live and work collectively …“In [1986], the National Center on Education and the Economy (formerly the Carnegie Forum) with Marc Tucker as president was asked to help in developing the National Education Goals upon which `America 2000’ and `Goals 2000’ would be based. Then in June 1990, NCEE (with Board members Hillary Clinton and David Rockefeller, Jr.) produced America’s Choice: High Skills or Low Wages? (proposing a `Certificate of Initial Mastery’), which greatly influenced the establishment of the Secretary’s Commission on Achieving Necessary Skills (SCANS) by the Department of Labor..“On Aug. 2, 1992, Assistant Labor Secretary Roberts Jones announced that the federal government was preparing to deny aid and student loans to schools that fail to prepare their graduates with the skills needed to compete for jobs in the modern workplace, saying `this is a touchy subject.’ Shortly thereafter, Marc Tucker wrote a letter to Hillary Clinton saying he had just come from David Rockefeller’s office where they were `celebrating’ Bill Clinton’s election as president, as that will allow putting into place their agenda to integrate education into a national system of `human resources development . . . from cradle to grave . . . (for) everyone’. . . .“NCEE Board member Hillary Clinton had been promoting the Certificate of Initial Mastery concept, and in April 1994 NCEE’s Tucker had published The Certificate of Initial Mastery: A Primer. The same year, Senator Ted Kennedy’s School-to-Work Opportunities Act was passed, and a national campaign is underway to promote the concept…“Currently, students have the most to say about what career paths they take. But as `human capital,’ their paths increasingly will be directed by society via STW/OBE educational programs so that they `demonstrate certain skills…“Student `profiles’ are an important part of certain STW initiatives, with employers having continual access to these as part of a permanent file on all individuals who are now considered to be `lifelong learners.’ In Communist China, the file is called a `Dangan’ and describes the value of the individual (`human capital’) to the State…”http://www.arthurhu.com/98/09/hydestw.htmThe Roosevelt Administration set the stage for the demise of capitalism and the advancement of socialism in America. It was the Democrat administrations that sponsored the great society programs of Kennedy, thwarted by a Republican congress, that were put into law by Johnson. LBJ’s program, which he called the Great Society, was the largest increase for big government dominance in the history of America.

g,.First, we have no economic health to return to. we have bubble creation economics to return to. where is the new bubble and can that be counted as a recovery?. for some few only..the new deal and war economy should never be connected by a ‘/’. any conflation of the two will suffer from over generalization and will lend itself to ideological and illogical conclusions. imo.regime uncertainty. yes. i would like to compare investment levels in nazi germany for the same time periods. 1929-1950.some investors bridged the philosophical divide so to speak.hedged you might say, lots of big money hedging. on the sidelines while government does the risky spending, lending,and the people supply the labor and war dead body count.see history of standard oil and germany ….http://reformed-theology.org/html/books/wall_street/chapter_04.htm..Standard Oil Fuels World War II..The Standard Oil group of companies, in which the Rockefeller family owned a one-quarter (and controlling) interest,1 was of critical assistance in helping Nazi Germany prepare for World War II. This assistance in military preparation came about because Germany’s relatively insignificant supplies of crude petroleum were quite insufficient for modern mechanized warfare; in 1934 for instance about 85 percent of German finished petroleum products were import…The solution adopted by Nazi Germany was to manufacture synthetic gasoline from its plentiful domestic coal supplies. It was the hydrogenation process of producing synthetic gasoline and iso-octane properties in gasoline that enabled Germany to go to war in 1940 — and this hydrogenation process was developed and financed by the Standard Oil laboratories in the United States in partnership with I.G. Farben…and it was worse …..also.. there was a plot for a faction on wall street to take over the country, see smedley butler, “war is a racket”. he describes being approached by a group of uncertain investors on wall st. to lead the u.s. army/marines to take control of the country and he testified before congress to this fact.so… regime uncertainty? yes, who is calling the shots?the people or the international investor and what impact can each party bring to the table?currently, the implication seems to be that the banks are being propped up for some future function, or, their collapse is being timed for some future and present private gain, beneficiaries unknown.the recovery of investment and economic health referred to above needs further exploration. the tremendous benefit of public investment during the depression and war effort must be seen as setting the stage for a “recovery”, by developing an industrial workforce, innovation, supply lines and relationships etc…..the Austrian school and their analysis strikes me as fascistic and willfully ignorant while attempting to appear philosophically egalitarian and thorough. but i am certainly no expert. public risk and loss for the sake of private opportunity or socialized risk to protect private profit is nothing more than fascism. who is public? labor. who is private? owner,investor?so that is the health of the system. are we to recover to a system where the investor is the 1-5% and the public is the 95% of the population with the majority of the 1-5% being internationalists?to me it is obvious that investment declined in the u.s. from 1941-1944, not because of government spending, but because investors could not determine the outcome of the war.if germany won, they would invest there primarily. if the u.s. and allies won the money would go there. money has no loyalty, no national boundary, and no soul. that is what the central banks facilitate. a structure can only realize it’s own function. from pjp, universal principles…..yet structures can and do exhibit plasticity manifesting unimagined potential effect..http://en.wikipedia.org/wiki/Business_Plot..The Business Plot (also the Plot Against FDR and the White House Putsch) was a political conspiracy in 1933 wherein wealthy businessmen and corporations plotted a coup d’état to overthrow United States President Franklin D. Roosevelt. In 1934, the Business Plot was publicly revealed by retired Marine Corps Major General Smedley Butler testifying to the McCormack-Dickstein Congressional Committee. [1] In his testimony, Butler claimed that a group of men had approached him as part of a plot to overthrow Roosevelt in a military coup….http://www.lexrex.com/enlightened/articles/warisaracket.htm.by idealizing investment and granting it causal status with regard to post war prosperity i think robert higgs misses the heart of the economic and political matter concerning post world war II industrialization. the story is infinitely more dynamic and complex and his conclusion is in part ideological speculation. cool graphs and charts though..the first sentence of this conclusion…..It is time for economists and historians to take seriously the hypothesis that theNew Deal prolonged the Great Depression by creating an extraordinarily highdegree of regime uncertainty in the minds of investors…these “investors” were weary of a system that brought about the crash of 1929 and all the corruption and speculation. they also, imo, detested the spirit of the constitution of the u.s.a. as far as it provides protections for “the people” by assigning congress ……Section 8. The Congress shall have power to lay and collect taxes, duties, imposts and excises, to pay the debts and provide for the common defense and general welfare of the United States; but all duties, imposts and excises shall be uniform throughout the United States;To borrow money on the credit of the United States;To regulate commerce with foreign nations, and among the several states, and with the Indian tribes;To establish a uniform rule of naturalization, and uniform laws on the subject of bankruptcies throughout the United States;To coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures;To provide for the punishment of counterfeiting the securities and current coin of the United States;….. etc…..he should add that the new deal also was instrumental and fundamental to the prosperity that followed the end of the war..but…if you were sighting his study to suggest something more subtle i may have missed you’re thread though i can see a few may be out there..CHAPTER FOUR, from “war is a racket” smedley butlerHOW TO SMASH THIS RACKET!WELL, it’s a racket, all right.A few profit – and the many pay. But there is a way to stop it. You can’t end it by disarmament conferences. You can’t eliminate it by peace parleys at Geneva. Well-meaning but impractical groups can’t wipe it out by resolutions. It can be smashed effectively only by taking the profit out of war.

Why Did Warren and Hank Invest in Goldman?“Treasury Secretary Hank Paulson’s stated objective in driving the $700 billion bailout package was to counter systemic risk within the US financial system. But rather than employing tax-payer dollars to get on with their business after lowering leverage levels in their balance sheets, the bailout targets appear to have been granted a license to revisit the financial marketplace to seek new types of opportunities altogether.On Wednesday, investment banking purists were shocked by reports that Goldman Sachs (GS) was considering launching an internet banking …” Read more

Maulden didn’t say anything new here. If you have been reading Robert Pretcher you would have known this since 2003. Prechter goes many steps forward and itemizes each asset class with a clear picture of time and price. Also, his belief in the ultimate impotent effort of the central banks over market forces, leaves you with a clear way out of this quagmire. He further empowers the individual with the courage to take personal responsibility for your assets which gives a great sense of peace.

From Bill Fleckensteins latest: “Why China will recover first”Recently I traveled to China to deliver a series of speeches. During visits to Beijing, Shanghai and Hangzhou, I was fortunate enough to meet with some people who know a lot about how the country functions. In this week’s column, let me share the highlights of what I learned.I think the most important thing for folks to understand is that China has not suffered the epic credit binge that much of the rest of the world has. China’s savings rate is high. Mortgages require sensible down payments. Credit is something that hasn’t quite come to China yet (although I understand that credit cards have recently become more available, especially in the big cities).People pay cash for most things, though they do use debit cards. From a credit standpoint, it seems similar to how life in America was back when “Leave It to Beaver” ruled the airwaves. Meanwhile, the people I met were very industrious and their enthusiasm seemed quite high. (As a traveler, I was happy to discover that the airports were new and the bags arrived quickly.)The biggest problem China faces is its dependence on exports. A large part of the export issue is the fact that China has roughly 150 million itinerant/migrant workers — yes, you read that number right — in the south who’ve moved there from the west. (Away from the big cities, life is difficult and people are poor.)But China understands this problem. (I have left out many others and don’t mean to gloss over them.) They are working overtime to stimulate the domestic economy, and there’s a lot they can do. More importantly, as a country that has accumulated a couple trillion U.S. dollars, China has the reserves with which to do so. Relative to the problems faced by most countries, China’s seem at least manageable and do not stem from having borrowed and spent like mad.Opportunity in its infancyThe other thing to note is that the “capitalistic” progress they’ve made is really only 15 to 20 years old. China’s cities are modern, and their infrastructure is very new. But from a socioeconomic standpoint, much of what I saw leads me to conclude that China is more like America was in the ’50s and ’60s. It is very early in the “China miracle,” if you will. But I have reached the completely obvious conclusion, as have so many folks, which is that China is the wave of the future…And, here at home, Fleckenstein had this to say:The next thing we should expect to see [here at home] is folks looking for an end to the recession on a regular basis — simply because we are now officially in one. That prognostication will likely originate from the same people who called a bottom nearly every day in housing stocks, then the housing market and then the stock market.But rather than some garden-variety recession, this is going to be the worst one in 50 years, and in fact is the “next time down” scenario I described in June of 2004 — with the economy, stocks and real estate all declining.Notwithstanding the massive monetary/fiscal stimulus that the government will be throwing at the problem, 2009 is going to be very ugly. Having said all that, I find it too dangerous to be short stocks, and far too early in the downturn to be long them.http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/why-china-will-recover-first.aspx?page=all

Latest Hussman is out:December 8, 2008Ambiguous Conditions Warrant ModerationJohn P. Hussman, Ph.D.All rights reserved and actively enforced.Reprint PolicyThe condition of the stock market here is ambiguous. Valuations are generally favorable, market action is generally unfavorable but with tenuous signs of improvement, the economy is deteriorating, and it is difficult to estimate how much further it will weaken, yet the outlook for further economic weakness is common knowledge, so it may already be reflected in prices.The ability to be comfortable with uncertainty is one of the qualities that allow good investors to function – to pursue a disciplined investment approach even when the likely direction of the market is ambiguous. …http://www.hussman.net/wmc/wmc081208.htmI guess I am not behaving like a “good” investor these days:-) More like an ambiguous investor, just like the market!

U R rite, these are must reads. We are in a WW recession. It is clear that under lower growth conditions that the natural tendency for all countries will try to curb imports as these subtract from GDP. Despite all the talk about how much the world has learned about trade protectionism leading to a path of ruin, human beings and thus human behaviour ain’t gonna change because we are in the 21st. century. Evolution takes tens of thousands of years, we are still the same bunch of misbehaving monkeys we were in the early 1900′s which was not even 100 years ago.It is also clear that our new president will want to protect US jobs and create new ones by trying to establish a more leveled playing field (e.g., demanding better working conditions for workers in countries we import from). No matter what the excuse is good or bad, the end result will be the same: Trade protectionist measures that will impact real world growth negatively.Does anyone want to keep the discussion going by starting to talk about Europe where the recession will be worse and protectionist tendencies a lot stronger that in the USA?

At this point, I feel I must again emphasize the importance of the USDollar’s future.There is no doubt about the Fed’s ability or determination to print “whatever it takes” to create inflation in a deflationary environment. They have all the license they need to do so.As an example, let’s go back a year or so. Who would have thought then that not only the US banks would all be bailed out, along with the Agencies as well as some Prime Brokers, now Detroit is lining up- and in some form WILL BE APPEASED. Next? States and counties. There is no doubt- the Fed will bail them out. Next will be Obama’s new deal. Forget billions. This will have no meaningful effect unless it is ultimately SEVERAL TRILLION. Add it all up folks- its all PRINTED MONEY.Uncharted waters? You bet- where no man has ever been before- in terms of fiscal stimulous and Govt bailouts. And this is only the beginning.Given the instability we have this far witnessed, combined with the total lack of vision and completely MISLEADING behaviour of those in power and so called “leaders” in our society, does anyone really think we are being told the whole truth? Of course not so we must default to what what we do know, and prepare accordingly.No Sovereign state in the history finance has successfully and so dramatically debased their own currency in terms of a favorable economic outcome. None. EVER. And this is debasement on a massive never before seen scale. The US believes they can do this successfuly by virtue of their hegemony as the world’s reserve. It matters not because personally, I will not take a bet on this as opting out of the US currency and it’s exposures is my personal preference.I am convinced the US will succeed in creating inflation.Not only do they have the will, they have the means.

Abolish the CIA.Reduce Pentagon spending by 90%. (only 10% of current spending is spent to actually protect our borders.)Tax land value and nothing else. (this will eventually eliminate underuse and mis-use of land.)Restore the power to coin money to Congress.Make private inheritance public.Problem solved. All problems solved, and sustainability becomes possible. There is lots of work to be done – jobs for everyone.

I was thinking last night that something is going to have to “give” and while I agree with ORs comments towards the top of this thread that dollar devaluation talk may be early – I also watched the Taleb interview, which echoed my comments/observations/thinking in previous days/weeks that everything is happening much faster and much sharper this time e.g. it is compressed. Perhaps this compression results from the instantaneous transfer and handling of information as Taleb suggests (a cancelled order at a Wal*Mart in the morning results in a factory closure in China a few hours later).I don’t know if the physics of compression can apply to economics, but if it does I think the implications are significant both (in a controlled or uncontrolled environment).Perhaps an engineer or physicist come economist can weigh in.

Benjamin Franklin: “Trade in general being nothing else but the exchange of labor for labor, the value of all things is most justly measured by labor.”It is impossible for anyone to labor more than twice as long and hard as anyone else.Deconstruct the billionaires. Quickly, quickly…or those in the house of have-nothing-left are going to have no choice but to come for them. The haves will set off the bombs to attempt to protect themselves. (NATO knows what’s coming – why else did they ask for permission to bomb pre-emptively?)such unnecessary trouble. such profound loss of happiness.all over the refusal to be fair.50 million working people starve every year, and NO economist gets it yet! Hilarious!

Benjamin Franklin: “Trade in general being nothing else but the exchange of labor for labor, the value of all things is most justly measured by labor.”It is impossible for anyone to labor more than twice as long and hard as anyone else.Deconstruct the billionaires. Quickly, quickly…or those in the house of have-nothing-left are going to have no choice but to come for them. The haves will set off the bombs to attempt to protect themselves. (NATO knows what’s coming – why else did they ask for permission to bomb pre-emptively?)such unnecessary trouble. such profound loss of happiness.all over the refusal to be fair.50 million working people starve every year, and NO economist gets it yet! Hilarious!

Benjamin Franklin: “Trade in general being nothing else but the exchange of labor for labor, the value of all things is most justly measured by labor.”It is impossible for anyone to labor more than twice as long and hard as anyone else.Deconstruct the billionaires. Quickly, quickly…or those in the house of have-nothing-left are going to have no choice but to come for them. The haves will set off the bombs to attempt to protect themselves. (NATO knows what’s coming – why else did they ask for permission to bomb pre-emptively?)such unnecessary trouble. such profound loss of happiness.all over the refusal to be fair.50 million working people starve every year, and NO economist gets it yet! Hilarious!

Benjamin Franklin: “Trade in general being nothing else but the exchange of labor for labor, the value of all things is most justly measured by labor.”It is impossible for anyone to labor more than twice as long and hard as anyone else.Deconstruct the billionaires. Quickly, quickly…or those in the house of have-nothing-left are going to have no choice but to come for them. The haves will set off the bombs to attempt to protect themselves. (NATO knows what’s coming – why else did they ask for permission to bomb pre-emptively?)such unnecessary trouble. such profound loss of happiness.all over the refusal to be fair.50 million working people starve every year, and NO economist gets it yet! Hilarious!

TELL ME WHERE? Where has it ever been written, taught or proven by any economist or business professor that injecting massive amounts (trillions) of money over a very short time (months) has not lead to severe devaluation of the currency and hyperinflation?

“Banks will be utilities and investment will be free of bailouts.” Nassim TalebWe have reached an inflection point of stress on Small Business in Main Street. Chase and Bank of America are shutting down the credit lines of small business WILLY NILLY!We all know they received bailout money and theyhold the largest portions of the total derivative positions in credit markets. Either the banks are madeinto utilities or a Depression is inevitable! Main Streetproductive capitalism will literally shrivel and your neighbors will be out of work! Please read Paragraph 7of Joe Nocera’s piece in the New York Times below!!Think of the consequences here, and call your congressmen and senators.Anonymous Banker: Why Creditworthy Businesses Can’t Get LoansBy Joe NoceraA.B. responds to those who commented on this recent post about why banks aren’t making small-business loans, brings back a horror story or two from the front lines of banking, and asks Jamie Dimon why he won’t Do The Right Thing.I appreciate everyone’s comments and corrections. There are a couple observations I’d like to make. The first is that Libor is set by polling a panel of banks that participate in the London wholesale money market. The US banks that participate in this panel are Bank of America, JPMorgan Chase and Citigroup. And who did I say the top two S.B.A. lenders were? (BofA and Chase, in case you’d forgotten.) I am not smart enough to know the significance of this or even if there is a link between these two, but it felt significant to me. But, here’s what I do know from first hand experience as a lender for twenty years. Libor has been available as a base rate, but only to the largest business clients in the wholesale commercial groups of the banks.The S.B.A. loans are a retail bank product, with few exceptions. All conventional retail bank business loan rates are priced with Prime as the base. If it was so imperative that the S.B.A. allow for Libor-based pricing, why weren’t these banks using Libor as the base for pricing all their small business loans these last two decades?I hope you are right, Commenter 27, when you wrote that banks will now start using Libor. I hope the Libor + 3 based pricing option encourages the banks to put more money out there to the small business owners through S.B.A. loans. An S.B.A. line for $100,000 would provide the bank with the guarantee, and today, carry a rate of 7.15 percent. The same S.B.A. line, priced using Prime would carry a rate of 6.25 percent. And the same line, under average conventional bank pricing (P + 5 percent), would carry a rate of 9 percent.I don’t think the banks will use the Libor rate option as much as you think they will. And I don’t believe that the Libor rate was ever a real consideration, merely just another excuse to make fewer loans under the S.B.A. program. I don’t believe that the additional spread, which appears to be less than 1 percent, is the factor that is going to get the banks moving in the right direction. I truly hope the banks prove me wrong and you right.Banks are not making loans. Does that comment mean that no loans are being made at any bank? Of course not. If the borrower provides the bank with both a belt and a pair of suspenders, the loan is being granted. The banks need to recapitalize and they are going to do that. But if the banks receive federal funding through the bailout program they should be required to utilize some of those funds for S.B.A. loans. The big banks are not going to voluntarily engage themselves in boosting our failing economy by proactively utilizing the SBA program, whether it is priced with a base of Prime or a base of Libor +3 percent. I just don’t see it happening.In fact, I see just the opposite. In addition to not making new loans, the banks are systematically withdrawing commitments and capital from the economy.This past week I spoke with a business owner who had a $150,000 home equity line that he used for business purposes at the end of each year. He’d borrow for a couple months and then pay the line off. Right now, there’s nothing outstanding on the line. He has an extremely viable company, although sales have declined this year. But he manages his expenses wisely and continues to be profitable. He has a credit score over 750. He has no personal debt, other than his mortgage, and he earns in excess of $200,000 a year.He just received a letter from his bank telling him that his equity line was cut from $150,000 to $16,000. And now, when his company needs funding for the next two months, he is scrambling to find a way to pull it all together, absent selling his stocks at significant losses.I helped him call his bank to see what had happened. It had decided that instead of using 90 percent Loan To Value (L.T.V.), which was the parameter when it gave him the line, they will now use 60 percent L.T.V. So it will reduce credit lines accordingly—and provide notification later.I called around to several banks to see what his options were. Chase is now using 50 percent L.T.V. for home equity lines. Jamie Dimon, Chase’s chief executive, recently held a town hall meeting in Seattle and was also the speaker at a luncheon of the Greater Seattle Chamber of Commerce’s Community Development Roundtable. At one of these events, he was quoted as saying, “When housing prices go up 100 percent in 10 years, we need to write a letter to the next generation: Don’t allow L.T.V.’s above 80 percent.”So, Mr. Dimon: Why is Chase evaluating their home equity lines today using a L.T.V. of 50 percent? You do realize that allowing your credit underwriting standards to swing so far to the other side is detrimental to our nation’s economic recovery, right?The banks are not asking for updated financial information, as all loan agreements and personal guarantees allow them to do. They aren’t making informed decisions on reductions of credit lines. They are making knee jerk reactions. Once again, they are not applying any credit review process. They didn’t do it when they made the loans and they aren’t doing it when they take the loans away.Look, I’m a banker. And I am an advocate of good solid underwriting procedures. Always have been, always will be. And the banks do need to protect themselves. Collateral values have decreased, and therefore the banks need to make adjustments in the availability of funds on lines secured by real estate. But when the reduction of the line is equal to an 89 percent reduction, without any level of credit underwriting, that is just … wrong. The banks started this crisis and they need to be accountable and part of the solution.I found a smaller community bank in our area that still provides equity lines using 80 percent L.T.V. It offers very competitive rates and a 4-star bank rating. And, it doesn’t credit score its loans. I sent the client there. I’ll let you know if the bank finds him creditworthy based on an 80 percent L.T.V..Another friend had his credit line cut. He has a business equity line of credit, a fairly unique product in the industry where the line is actually to the business, but it is secured directly by a lien on the personal real estate. He asked me to look over his loan documentation to see if he had any case for an argument against cutting his line.I read his personal guarantee, security agreement and Business Equity Line of Credit Agreement from that bank. And, basically, if the bank chooses to cut his line because the value of the collateral decreased, he cannot do anything to change that.But there was an interesting line written into the guarantee, that I thought might bring some humor to this otherwise humorless topic. And I quote, “Guarantor agrees to notify Bank of any violation of any applicable usury law within 60 days of its occurrence, and Bank will have 60 days to correct suc
h violation.”Big Banks! Love them, or perhaps, leave them, and go to the community banks.Anonymous Banker: Why Creditworthy Businesses Can’t Get LoansBy Joe NoceraA.B. responds to those who commented on this recent post about why banks aren’t making small-business loans, brings back a horror story or two from the front lines of banking, and asks Jamie Dimon why he won’t Do The Right Thing.I appreciate everyone’s comments and corrections. There are a couple observations I’d like to make. The first is that Libor is set by polling a panel of banks that participate in the London wholesale money market. The US banks that participate in this panel are Bank of America, JPMorgan Chase and Citigroup. And who did I say the top two S.B.A. lenders were? (BofA and Chase, in case you’d forgotten.) I am not smart enough to know the significance of this or even if there is a link between these two, but it felt significant to me. But, here’s what I do know from first hand experience as a lender for twenty years. Libor has been available as a base rate, but only to the largest business clients in the wholesale commercial groups of the banks.The S.B.A. loans are a retail bank product, with few exceptions. All conventional retail bank business loan rates are priced with Prime as the base. If it was so imperative that the S.B.A. allow for Libor-based pricing, why weren’t these banks using Libor as the base for pricing all their small business loans these last two decades?I hope you are right, Commenter 27, when you wrote that banks will now start using Libor. I hope the Libor + 3 based pricing option encourages the banks to put more money out there to the small business owners through S.B.A. loans. An S.B.A. line for $100,000 would provide the bank with the guarantee, and today, carry a rate of 7.15 percent. The same S.B.A. line, priced using Prime would carry a rate of 6.25 percent. And the same line, under average conventional bank pricing (P + 5 percent), would carry a rate of 9 percent.I don’t think the banks will use the Libor rate option as much as you think they will. And I don’t believe that the Libor rate was ever a real consideration, merely just another excuse to make fewer loans under the S.B.A. program. I don’t believe that the additional spread, which appears to be less than 1 percent, is the factor that is going to get the banks moving in the right direction. I truly hope the banks prove me wrong and you right.Banks are not making loans. Does that comment mean that no loans are being made at any bank? Of course not. If the borrower provides the bank with both a belt and a pair of suspenders, the loan is being granted. The banks need to recapitalize and they are going to do that. But if the banks receive federal funding through the bailout program they should be required to utilize some of those funds for S.B.A. loans. The big banks are not going to voluntarily engage themselves in boosting our failing economy by proactively utilizing the SBA program, whether it is priced with a base of Prime or a base of Libor +3 percent. I just don’t see it happening.In fact, I see just the opposite. In addition to not making new loans, the banks are systematically withdrawing commitments and capital from the economy.This past week I spoke with a business owner who had a $150,000 home equity line that he used for business purposes at the end of each year. He’d borrow for a couple months and then pay the line off. Right now, there’s nothing outstanding on the line. He has an extremely viable company, although sales have declined this year. But he manages his expenses wisely and continues to be profitable. He has a credit score over 750. He has no personal debt, other than his mortgage, and he earns in excess of $200,000 a year.He just received a letter from his bank telling him that his equity line was cut from $150,000 to $16,000. And now, when his company needs funding for the next two months, he is scrambling to find a way to pull it all together, absent selling his stocks at significant losses.I helped him call his bank to see what had happened. It had decided that instead of using 90 percent Loan To Value (L.T.V.), which was the parameter when it gave him the line, they will now use 60 percent L.T.V. So it will reduce credit lines accordingly—and provide notification later.I called around to several banks to see what his options were. Chase is now using 50 percent L.T.V. for home equity lines. Jamie Dimon, Chase’s chief executive, recently held a town hall meeting in Seattle and was also the speaker at a luncheon of the Greater Seattle Chamber of Commerce’s Community Development Roundtable. At one of these events, he was quoted as saying, “When housing prices go up 100 percent in 10 years, we need to write a letter to the next generation: Don’t allow L.T.V.’s above 80 percent.”So, Mr. Dimon: Why is Chase evaluating their home equity lines today using a L.T.V. of 50 percent? You do realize that allowing your credit underwriting standards to swing so far to the other side is detrimental to our nation’s economic recovery, right?The banks are not asking for updated financial information, as all loan agreements and personal guarantees allow them to do. They aren’t making informed decisions on reductions of credit lines. They are making knee jerk reactions. Once again, they are not applying any credit review process. They didn’t do it when they made the loans and they aren’t doing it when they take the loans away.Look, I’m a banker. And I am an advocate of good solid underwriting procedures. Always have been, always will be. And the banks do need to protect themselves. Collateral values have decreased, and therefore the banks need to make adjustments in the availability of funds on lines secured by real estate. But when the reduction of the line is equal to an 89 percent reduction, without any level of credit underwriting, that is just … wrong. The banks started this crisis and they need to be accountable and part of the solution.I found a smaller community bank in our area that still provides equity lines using 80 percent L.T.V. It offers very competitive rates and a 4-star bank rating. And, it doesn’t credit score its loans. I sent the client there. I’ll let you know if the bank finds him creditworthy based on an 80 percent L.T.V..Another friend had his credit line cut. He has a business equity line of credit, a fairly unique product in the industry where the line is actually to the business, but it is secured directly by a lien on the personal real estate. He asked me to look over his loan documentation to see if he had any case for an argument against cutting his line.I read his personal guarantee, security agreement and Business Equity Line of Credit Agreement from that bank. And, basically, if the bank chooses to cut his line because the value of the collateral decreased, he cannot do anything to change that.But there was an interesting line written into the guarantee, that I thought might bring some humor to this otherwise humorless topic. And I quote, “Guarantor agrees to notify Bank of any violation of any applicable usury law within 60 days of its occurrence, and Bank will have 60 days to correct such violation.”Big Banks! Love them, or perhaps, leave them, and go to the community banks.

I am afraid that the credit insanity has set the stage for chaos for the productive sector of capitalism. We failed to see the ramifications of unregulated banking.Fractional reserve,leverage,derivatives, and money being generated by computer keystrokes cannot be reversed without chaos. The uncertainty will magnify the primal instincts of fight or flight and we will have a situation more akin to the period after the fall of Rome. Dark ages with nuclear weapons is nota good combination. The farmers of the world have nocredit to buy fertilizer and food will be scarce inyears to come. I would be appreciative of any arguments against what I see!

So far. I mostly will be agreeing with Bill Fleckenstein in my blog I plan about my long business trip here in China, except for a couple of important points:- He seems to have only made it to big cities. As I have gotten a look as some more rural areas and smaller cities, I will have more to add about their modern infrastructure and how it really plays out, especially environmentally speaking.- I will be putting China’s socioeconomic progress earlier, like maybe the 1920s or 1930s in some ways.- Their governmental system still needs to change. It is doing so slowly. It has not yet been severely yested.- I have been dealing with the Chinese on some high tech interchange and I think there is an important dynamic between China and America in this area to be discussed. The ‘wave of the future’ I think will really be a joint US/Chinese wave, if I am reading my green tea leaves right.More when I complete my trip.

Definitely the information age and the explosion of the internet has its part to play in the compression happening. Also, I think analytical methods (ie, statistical analysis, stochastic techniques, etc) applied to financial engineering (and, in the end monetary policy and government reaction) miss one very important piece – the variable of human behavior.As an example, the monetary policy seeks to restart lending. Those who reason with numbers believe that, if money is made cheap enough, people will borrow.But, they are reckoning without the variable of the individual consumer and the people running businesses and banks, who very reasonable are tightening their belts, refusing to grant risky loans, and shoring up business balance sheets rather than expanding through borrowing.In other words, the economic system contains far too much unpredictable human behavior to be predicted by models, as we are finding out now in our present distress. There are elements of control system theory, however, that apply at a gross level to things like the monetary supply.BTW, I am a practicing engineer but no econimist!

Europe =- The demise of the UK, done in by its loss of its manufacturing industry and easy credit- The marginilization of the weaker med countries,(Italy, Spain, Greece)due to EM exposure- Collapse in Eastern Europe due to currency and capital flightWho is left? – They who have always been, France and Germany (plus the bit players)- Germany = self reliance, and they will not play ball in any global reaction to the crisis. Call the protectionist if you want, but their reaction will be – German!- France = Sarkozy on a global power trip, trying to cause the ascendency of French leadership again in the world. He will not hesitate to be protectionist.Tie all of it up in a bow of a common currency for the EU at least but individual national interests causing constant friction, and banks as deep in it as the US ones, and the ECB with big goals but small pockets, and there you have an admittedly oversimplified view of Europe as it slides into crisis.ex VRWC

Excellent info! I have also watched BofA and others reduce credit card lines by 90%, freeze Home equity lines, deliberately stall short sales when they are on the 2nd mortgage and generally act beligerent and outright mean to customers who are trying to obtain financing! But this should not surprise us; what else would a greedy entity do when they mismanaged most of their assets? In fact, we can expect them to continue hoarding cash, not making many loans and essentially holding the public hostage UNTIL they receive even better terms from “Bailout Ben” and “How much do you want Hank”! This most clearly illustrates the power and control of corporations that have become “too big to fail”! Of course, the solution to this problem is the exact opposite of what the govt and our corporations want us to think; that is, save them instead of letting them fail, erasing their debt and being replaced by the fundamental building block of America: SMALL BUSINESS: which is more nimble, creative and gives millions of Americans the chance to succeed rather than become pawns of the financial corporate elite! If people really are serious (unlike our govt) about taking back the power and control of the banking monsters, then withdraw all of your assets and deal only with small community banks; otherwise, expect things to remain the same!

Being naive is a good thing. After the almost 20% sprint from the Nov 21 low, I could not convince myself to continue holding equities given the dreadful fundamentals. God bless those who can ride these sporadic speculative waves and sleep well at night.

So Obama and co. is not part of the WS Boys team? Try again. What do you think was behind the Friday afternoon rally? The naive will say: The FED’s purchase of 9 billion worth of agency paper. Me think that perhaps those high up knew about the Sunday speech… Ii didn’t so I sold out Friday.

\Reports: Tribune Co. hires advisers as it weighs bankruptcy filing | December 7CHICAGO (AP) — Tribune Co., owner of the Los Angeles Times and Chicago Tribune, other newspapers and the Chicago Cubs and Wrigley Field, has hired financial advisers ahead of a possible filing for bankruptcy-court protection, according to reports on Sunday…The Wall Street Journal, quoting people familiar with the matter, said a bankruptcy filing could come as early as this week. It said Tribune Co.’s cash flow may not be enough to cover nearly $1 billion in interest payments that are due this year.http://biz.yahoo.com/ap/081207/tribune.html

Follow-up to a comment from last week …Sure looks like the US Dollar has completed a head-and-shoulders pattern at this stage. Should begin to move downwards. This comment is not offered for trading purposes.PeteCA

We allowed the government to stop supplying M3 Reports so we have alternative sites to get those unofficial numbers now, Gold is now being priced on eBay, the stock market is unreliable and soon it will be viewed and invested in from another vantage point. So I say we make up be down and right be left just so we can keep things in perspective.

Good post today from MacroMan…”Also frozen this morning is financial market liquidity. Macro Man is looking agog at his futures trading screen: Bunds are two ticks wide, 40 up, and US long bonds are two ticks wide, two lots by one lot. Markets (fixed income, equities, and currencies) have moved quite a bit this morning, but it would appear to be more a function of illiquidity than a sober re-appraisal of market fundamentals”…http://macro-man.blogspot.com/2008/12/frozen.html

VRWC: That was an excellent post, and it had not yet been contributed.Ergo, you meet the criteria for inclusion in the so-called BrainTrust.We’ll become an actual brain trust when we:a. Precisely identify the problem and build a consensus and critical-mass around itb. Generate a set of goals (intermediate deliverables) that, once accomplished, solve the problem,c. Develop an excellent strategy to achieve the goals, and finally and most importantly,d. Execute the bejeeesus out of that strategyThen, and only then, will we earn the name “BrainTrust”.For now, the name should be seen as “conditional”.

“I believe all of you are as open and willing to listen as anyone else in America. I believe you care about this country and the future we are leaving to the next generation. I believe your work to be a part of building a stronger, more vibrant, and more just America. I think the problem is that no one has asked you to play a part in the project of American renewal.” – Barack Obama, speaking to the masters of “American” finance capitalism at the headquarters of NASDAQ, Wall Street, New York City, September 17, 2007You see, my darlings, the whole problem with the financiers is that they just haven’t been asked to help!priceless.

I agree with Fleckenstein that 2009 is going to be “ugly.” And I believe current economic policy will morph into another depression. This review of Rothbard’s book on the GD is worthy of a read:”Murray N. Rothbard’s “America’s Great Depression” is a staple of modern economic literature and crucial for understanding a pivotal event in American and world history…Since it first appeared in 1963, it has been the definitive treatment of the causes of the depression. The book remains canonical today because the debate is still very alive.Rothbard opens with a theoretical treatment of business cycle theory, showing how an expansive monetary policy generates imbalances between investment and consumption. He proceeds to examine the Fed’s policies of the 1920s, demonstrating that it was quite inflationary even if the effects did not show up in the price of goods and services. He showed that the stock market correction was merely one symptom of the investment boom that led inevitably to a bust.The Great Depression was not a crisis for capitalism but merely an example of the downturn part of the business cycle, which in turn was generated by government intervention in the economy. Had the book appeared in the 1940s, it might have spared the world much grief. Even so, its appearance in 1963 meant that free-market advocates had their first full-scale treatment of this crucial subject. The damage to the intellectual world inflicted by Keynesian- and socialist-style treatments would be limited from that day forward.http://www.mises.org/store/Americas-Great-Depression-P63.aspx?gclid=CKfwv7WusZcCFQp2gwod1UO2jgThe arguments here against Rothbard soon will be settled once and forevermore–by the facts: Obama’s handlers are setting policy to repeat the New Deal. We soon will know from our new standards of living and those of the Fed bankers just who were the winners…and the losers.Incidentally, “Many people date the beginning of the Depression at October 24, 1929, Black Thursday, the day the stock market crashed. This was indeed a traumatic day for those who owned stock as sales volume broke all records. But the decline in overall stock prices was only about 2.5%, from 261.97 to 255.39 as measured by the New York Times index of 50 stocks. Most of the decline still laid in the future; the market hit bottom on July 7 of 1932 when the Times index was only 33.98, a decline of over 89% from its high of 311.90 of September 19, 1929.” Robert Schenkhttp://ingrimayne.com/econ/EconomicCatastrophe/GreatDepression.html

By measuring supply/demand factors along with cash pumps to the Fed’s market slaves (birdie information). That combined with the approach of a full moon as it pertains to the fresh breakout of the 4 week triangle measurment achieved this a.m.

The expansive monetary policy that Rothbard refers to, is a perfect example of the massive one-sided transfer of public money to the investment bankers, and is creating the serious economic imbalances he described. It’s interesting that the dinosaurs were too big to perish, but they perished anyway, some say because the food source they fed on became increasingly inadequate. We are the food source of the banker behemoths: when we fail, they fail.

How long can our “representatives” remain in denial as the nation’s economic underpinnings tremble and creak and snap under Bernanke’s wild-eyed and maniacal Fed policies that are destroying value and our means of exchange?How long will they deny that the central bank and its fiat monetary system are the blame not only for what happened in the 1930s, but what is now happening?Rep. Ron Paul said in 2003: “This country cannot afford another attack on economic liberty similar to what followed the 1929 crash that ushered in the economic interventionism and inflationism which we have been saddled with ever since.These policies have brought us to the brink of another colossal economic downturn…Big business and banking deserve our harsh criticism…because of the special benefits they receive from a monetary system designed to assist the business class at the expense of the working class.Liberals foolishly believe that they can control the process and curtail the benefits going to corporations and banks by increasing the spending for welfare of the poor. But this never happens. Powerful financial special interests control the government spending process and throw only crumbs to the poor. The fallacy in this approach is that the advocates fail to see the harm done to the poor, with cost of living increases and job losses that are a natural consequence of monetary debasement.

Another must read this time from AlphavilleSocGen questions contrarian credit calls”Suki Mann, credit strategist at SocGen and reformed bull, is not convinced by the contrarian case that credit is overdue for a rally.He contends, inter alia:We’re in a period of maximum bearishness and popular theory is that when sentiment is this way inclined, being contrarian will pay dividends. Not this time, or at least, not just yet… Read more

FOR THE COUNTRY OR FOR YOURSELF?If every working American was offered 5 million cash with the stipulation that 90% of any money made over that would be used to help others, wouldn’t >99% of the people accept that? So why is our system being run by those who have at least 200 times that ($1 billion) and forever want more?!

These are the big time investors, IMO, who are making money on, first, a lack of direction in the markets as to what’s going to happen, and second, on bailout news. If you remember, every time they’ve had bailout announcement news, from F&F, AIG, Bear on down… the markets went up. But as Roubini pointed out, most of the rallies backed off.I think big time investors took advantage all last week of the market’s lack of direction and the many rumors being floated to resolve the big car company problem: bankruptcy, GM/Chrysler merger, firing the officers and zeroing out the shareholders, “car czar” suggestions, that $15 billion is only the bailout beginning, and a number of other wild ideas. Then, over the weekend, the possibility of bankruptcy softened on news of a bridge loan, and, then, the pretense of change by having the CEO step down and perhaps keeping on the same board of directors. And so, the game goes on, the big team players making money today off the 401(k) hometown team. I doubt if the mutuals are sharing in all this. Just my opinion.

From Barry Ritholtz blog…Genius!…Well, no worries over the lack of funding for health care. I have figured out a simple way to insure that every man woman and child int he US is covered by health care insurance. I took a page from the cleverest of the financial engineers on Wall Street, and all it took was a little of that street magic and derivative-based hocus pocus.It goes something like this:1. Set up a large, well capitalized hedge fund. About $5B should do it.2. The prospectus of the fund should note its purpose is to “Seek out profit opportunities via arbitraging inefficiencies in the markets and health care system of the United States.” Include standard “Socially Conscious” fund language in clauses such as Do well by doing good.3. Launch the fund — and promptly max out your leverage. Today’s environment makes it difficult to go 50 to 1, but getting 10 or 20 to 1 should not be much problem.4. Use the money to write Credit Default Swaps with a notational value of $3 trillion dollars. The premia on these CDS should be about 10-15% or so.5. Rollover the cash premiums — about $350 billion dollars worth — into a national fund. Use it to buy health care insurance for all US citizens.6. Declare that due to current credit conditions, your unfortunately must announce to your counter-parties that you will be defaulting on these CDS. Note that significant amounts of this paper are held by JP Morgan and Citi. Another trillion is held by China and Japan, with Sovereign Wealth Funds owning the rest.7. Send out a press release announcing “systemic risk.” Tell the Treasury Secretary and the Federal Reserve Chief that your imminent collapse will wreak global havoc. Apply for bailout.Congratulations! You have National Health Care!

I already warned you that the market is no longer on a level playing field. There is no one left to short stocks here, they have all been driven out by the limitless suplly of cash the “new” bulls have (i.e. Federal govt). That combied with a fresh low in AAII bullish sentiment has allowed for a relentless rally, brush off the Dow 10K hats, you will need them by the end of the year. News doesn’t matter anymore and istead of “free markets” we now have the “free press”-printing press that is LOLOLOLOL!

FOR IMMEDIATE RELEASEDecember 8, 2008 Contact Bryan Hubbard202 874 5770Comptroller Dugan Highlights Re default Rates on Modified LoansWASHINGTON Comptroller of the Currency John C. Dugan said today that new data shows that more than half of loans modified in the first quarter of 2008 fell delinquent within six months.“After three months, nearly 36 percent of the borrowers had re-defaulted by being more than 30 days past due. After six months, the rate was nearly 53 percent, and after eight months, 58 percent,” the Comptroller said in remarks at the Office of Thrift Supervision’s National Housing Forum today…

From CR:http://calculatedrisk.blogspot.com/2008/12/dugan-high-re-default-rates.htmlComptroller of the Currency John C. Dugan said today that new data shows that more than half of loans modified in the first quarter of 2008 fell delinquent within six monthsNo problema! Obama’s new-new deal will stop this 100% by giving people who cannot afford their mortgage a debt-free house, no strings of any kind attached!No more payments, no more hassle, the Banks get the principal mortgage balance + interests + penalties, from Uncle Sam via T bill financing at under 3%.Yes Virginia, it is no wonder that Amerika, the land with the most living Nobel Prize economists, ended up being the land that invented the free lunch.We invented TV and the Internet, put a man on the moon, so with all those smart economists it is only natural that we were the first to show free lunches exist and exploit them:-)

Edward Bellamy, from “EQUALITY” – 1897″Let not anyone falsely suppose that I am dreaming of a happiness without toil, of abundance without labor. Labor is the necessary condition, not only of abundance but of existence upon earth. I ask only that none labor beyond measure that others may be idle, that there be no more masters and no more slaves among men. Is this too much? Does any fearful soul exclaim: ‘Impossible – that this hope has been the dream of men in all ages, a shadowy and Utopian reverie of a divine fruition which the earth can never bear? That the few must revel and the many toil; the few waste, the many want; the few be masters, the many serve; the toilers of the earth be the poor and the idlers the rich, and that this must go on forever?’”Ah, no; has the world then dreamed in vain? Have the ardent longings of the lovers of men been toward the unattainable felicity? Are the aspirations after liberty, equality, and happiness implanted in the very core of our hearts for nothing?”The procession of political, social, and religious systems, the royal, imperial, priestly, democratic epochs, and all other great phases of human affairs, had been as passing cloud shadows, mere fashions of a day, compared with the hoary antiquity of the rule of the rich. Consider how profound and how widely ramified a root in human prejudices such a system must have had, how overwhelming the presumption must have been with the mass of minds against the possibility of making an end of an order that had never been known to have a beginning! What need for excuses or defenders had a system so deeply based in usage and antiquity as this? It is not too much to say that to the mass of mankind in my day the division of the race into rich and poor, and the subjection of the latter to the former, seemed almost as much a law of Nature as the succession of the seasons – something that might not be agreeable, but was certainly unchangeable. And just here, I can well understand, must have come the hardest as well as, necessarily, the first task of the revolutionary leaders – that is, of overcoming the enormous dead weight of immemorial inherited prejudice against the possibility of getting rid of abuses which had lasted so long, and opening people’s eyes to the fact that the system of wealth distribution was merely a human institution like others, and that if there is any truth in human progress, the longer an institution had endured unchanged, the more completely it was likely to have become out of joint with the world’s progress, and the more radical the change must be which should bring it into correspondence with other lines of social evolution.(next bit from memory, may’nt be exact quote)The principle of private inheritance – the backbone of rule by the rich – has been proven to have no ethical nor rational defense – none. It is mere convention established by manmade law. The merely traditional institution called private inheritance, and the dominion of the money power based upon it, are rightfully to be disestablished as having neither rational nor moral basis.

APGoldman analysts: Credit crisis only halfway overMonday December 8, 12:21 pm ETGoldman analysts predict that banks are only halfway through a 3-year credit cycleNEW YORK (AP) — Back in April, Goldman Sachs CEO Lloyd Blankfein said that the credit crisis, if it were a football game, was “probably in the third or fourth quarter.” Eight months later, Goldman analysts are saying the current credit cycle has only now reached half-time….http://biz.yahoo.com/ap/081208/credit_cycle_goldman_analysts.htmlSo in football terms, where are we in the recession?

Could it be that all of the bailout money given to the banks and insurance companies is being used by them to buy stocks leading to the rise in their own company’s stocks as well? Wouldn’t this be the ultimate insider trading strategy? Wait a minute, now I’m starting to sound like you know who!

Al Gore invented the Internet, if he wasn’t so busy fixing the Climate maybe he could be the Housing Czar – heck he could do both – a house for every family each equipped with CFL bulbs. (mercury notwithstanding)

You gotta remember the importance of stocks in their contributions to both ECRI’s and the Conf Boards leading indicators. By keeping stocks on a Northerly trajectory, they can start to level out/turn around those leading indicators. That in turn will aleviate the stress of no clarity on a recovery time frame and will start the self-fulfilling snowball of a buying frenzy. We will be lucky if 2008 ends the year down 25%!

OR: We’re nearing half-time break. The Fed has decided to give all the spectators in the stadium $20 apiece (with counterfeit money), so they can have free popcorn, hotdogs and beer. Why ruin a good game – by worrying who’s still gonna’ have a job next week?Seriously … I have no idea where we really are in the football game. But watch the credit markets – not the stock markets.PeteCA

Are you ready for a Dow close 417 points higher!!! Remeber, the whole world believes stocks lead teh economic bottom by 6 months or so. Look back to 1975, at a chart of the S&P if you want to see what is about to happen.

A man is given a piece of Manhattan by a King or a Governor. Generations of people come, and the work everyone does, building a city on and around the land, builds up the value of the land. That is, wealth is created by the sacrifices of everyone who worked on that land, but it is said to belong to, and it goes to, the one who was gifted the land in the first place and his heirs, who sacrificed nothing to get “their” money.That is a free lunch.Free breakfasts and lunches and dinners and midnight snacks. For generation after generation of one family. Forever.

Pete, the sheeple know nothing of the credit markets. They don’t get quarterly statements on teh credit markets. You and I pay attention, but the sheeple have no clue, they watch stocks and that is all the news agencies reprot these days. Obfuscation leads to confiscation!!!!

US Dollar now closing down towards 85, certainly trading out-of-bounds from the rising curve it was on. Looking very much like a head-and-shoulders pattern now. Which raises the BIG question of the day. If you were a foreign buyer of US debt (UST’s), why on earth would you keep buying US bonds or treasuries at the current time? The Fed has forced the yields down to around 3% (or less). The dollar looks like it is going to decline. This looks like a great opportunity for foreign holders of US debt to cash out (while prices are excellent), and get out. This would mean that the Fed transitions to become the biggest buyer of US debt in the future – and all with printed money.PeteCA

Pete, the US govt can print more money in a week than the G7 in aggregate can come up with to buy our debt! The game is offically rigged at this point, “logic” will soon be removed from both Websters and Wikipedia. If you wait for the logical, you miss the absurdity train!

Just to offset the withdrawal in private sector spending we expect to see in 2009, the government needs to come up with at least a $600 billion stimulus package, and in one year, not two. To just prevent the unemployment rate from rising any more than it already has – to nearly a 15-year high of 6.7% – then we would need to see a plan closer to $1 trillion in size for next year. Since prior commitments, the automatic stabilizers and the recession’s impact on tax revenues meant the deficit was already set to rise to a record $1.5 trillion in the coming year, the stimulus plan that would be big enough to stop the recession in its tracks would approximate 14% of GDP.By way of comparison, the highest the deficit-to-GDP ratio ever got to in the 1930s was 6% (but there were no automatic stabilizers back then such as jobless benefits or welfare), in WWII it reached 30%, and in Japan it topped 10% by the mid-1990s.http://fabiusmaximus.wordpress.com/2008/12/08/new-deal/

My friend told me how he exchanged his credit history for cash. The house that he brought in 2003 had a monthly mortgage payment of $4000, beginning August he stopped paying the mortgage. The bank kept calling but my friend said he had no money to pay. The bank lowered his rate and cut the principal and now he is paying $2200 per month for the same house. He’s happy as never before and back on buying the next big thing on his credit card.This financial system, or what is passed for a financial system, is a pure scam. Meant to penalize safe players and rewards risk taking without any penalty. The housing bubble was no accident. Those who don’t lever up as much they can turn out to be the fools in the end

From this week’s free email from TooMuch dot org:A Moneyman’s Welcome WisdomJohn Bogle, Enough: True Measures of Money, Business, and Life.John Wiley & Sons, 276 pp.Sam Pizzigati writes about John Bogle’s book:Someday we will have an incredibly detailed, blow-by-blow history of how the titans of Wall Street, in the early years of our current century, came to drive the global economy over the edge. In the meantime, we have this brief and breezy new book from an honorable man who has spent the last 57 years laboring — and thinking — in the vineyards of high finance.This insightful small volume will do just fine.The author, John Bogle, deserves our attention. He founded the Vanguard Group, a powerful force in today’s mutual fund industry, and pioneered one of the industry’s most consumer-friendly innovations, the “index fund.” In 1999, Fortune magazine named Bogle one of the four “investment giants” of our time.Yet Bogle, for all his financial wizardry, has amassed a rather puny personal fortune — puny, that is, by financial industry standards. Almost a quarter of America’s 400 richest, reports Forbes, hail from finance, and these finance superstars all hold fortunes worth over $1.3 billion. Bogle doesn’t even have $100 million.The 79-year-old Bogle doesn’t mind. He feels he has plenty, and he has penned this meditation on “enough” to warn us what happens when we let — when we encourage — some among us to chase after too much.This wild chase has turned Bogle’s beloved profession of finance, a trade that he believes once added value to society, into a racket that extracts it.Enough takes us beyond the daily headlines of mergers and meltdowns to paint this extraction big picture. In 2007, Bogle notes, the managers of mutual funds collected an amazing $100 billion in fees and expenses. But mutual funds, he hastens to add, make up only one piece of America’s finance superstructure.“Add to that $100 billion in mutual fund costs,” Bogle advises, “$380 billion in additional investment banking and brokerage costs, plus all those fees paid to the managers of hedge funds and pension funds, to bank trust departments and financial advisers and for legal and accounting fees, and the tab comes to roughly $620 billion.”In 2006, financial firm operations accounted for 35 percent of the profits of America’s 500 top publicly traded companies, a greater share of total corporate profits than came from the nation’s energy and high-tech sectors combined.In theory, observes Bogle, finance merely “lubricates the machinery of capitalism.” In today’s world, finance no longer lubricates. Finance dominates. The rest of business dances to the financial sector’s tune. Our financial system, Bogle charges, “has, in substance, challenged our corporations to produce earnings growth that is, in truth, unsustainable.”Corporations simply cannot meet these expectations the right way — “by improving old products and creating new ones, by providing services on a more friendly, more timely, and more efficient basis,” by challenging their people “to work more effectively together.”Instead, to please Wall Street and stuff their own pockets, corporate leaders spend their days inflating sales and plotting mergers. And “if you can’t merge your way into meeting the numbers,” top execs understand, you “just change the numbers.”Bogle reflects, near Enough’s end, on one of his heroes, Benjamin Franklin. The inventor of the lightning rod and the Franklin stove never patented his handiwork. Knowledge, Franklin believed, should be our “common property.”Franklin’s noble values, Bogle muses, “stand in bold contrast” to the “obscene salary demands of the executives of our giant corporations and the enormous compensation paid to hedge fund managers.”Yes, Bogle goes on to acknowledge, money matters. All of us need “the security of freedom from want, the ability to pursue our chosen careers, the wherewithal to educate our children, and the comfort of a secure retirement.”“But how much wealth do these goals require?” Bogle asks.“Indeed,” he sums up, “we ought to wonder whether the super-wealth we observe at the most extreme reaches of our society — the ability to acquire an infinite number of the things of life — is not more bane than blessing.”

make that toomuchonline.orgStat of the WeekThe 50 highest-paid corporate execs in the Carolinas, the Charlotte News & Observer reported last week, last year pulled in an average $105,969 a week, about triple what typical workers in the Carolinas made for the entire year.

C-Man: They can do that alright. But it means that every day the USA comes closer to resembling – and behaving like – a third world country in a massive debt crisis. Why would anybody keep their assets in a crumbling third-world economy?PeteCA

Because if they sell, selling begets more selling and so on. With the MASSIVE amounts they hold, they would slit their own wrists! Trust me, I agree with you that we some “splainin” to so in the future about how we could dare shell out $100 to fix a $30 problem!

@ CM – 1st class call on the day – now if only I could learn to trade – I was in and out of SSO twice and managed to be down for the day – that takes a very special talent (maybe I should trade SDS but make my decisions watching SSO – or visa versa) How I long for the good ‘ol marketing timing days playing Int Equity funds (fish in a barrel that was)@ PeteCA – this video of Peter Thiel (Clarion Capital) on the markets, deflation etc… – good stuffhttp://www.cnbc.com/id/15840232?video=955505429&play=1

Great.Print more money, give to Citigroup = Mega RallyPrint still more money, give to Ford = RallyPromise to print more (Obama stimulus plan) = Mega RallyThe solution =Mr. Ben, throw away your damned Helicopter.Ask the Russians for help.Use an Antonov 225 with 32 wheels.”With a maximum gross weight of 640 tonnes (1,411,000 lb), the An-225 is the world’s heaviest and largest aircraft”Give more dollars to the friends. As you know the first to spend the dollars are the more rewarded ones.New Name: Ben Antonov (forget Ben Helicopter)

Good, James.Therefore an Antonov is not sufficient 640 ton = 58 billionsBen should use RMS Titanic.Several similarities:- was funded by JP Morgan (the greatest exposition to derivatives today – notional)- 46,328 gross register tons – more bills to you!!- In her time, Titanic surpassed all rivals in luxury and opulence- RMS = Royal Mail Ship is the ship prefix used for vessels that carry mail = great for paper money.the only problem is: it sank!!!Wikipedia:The SS Californian, which was nearby and stopped for the night because of ice, also saw lights in the distance. The Californian’s wireless was turned off, and the wireless operator had gone to bed for the night.who has gone to bed here??The people of course!

Keep it simple, the fundamentals haven’t changed, the news is bad and will get worse. What is going on in households and companies across America and around the world doesn’t show reason or cause for a long term rally. Stay focused on the facts they haven’t changed. Do you seriously think this is the bottom?

g, it is the MOTHER of all sucker bear markets. that you want in on the bottom makes you the perfect potential sucker. the song goes…” girl down town, said she wanted to rolli took her by the hand , then she said hold on..you got to pay.you know what i mean?she said you might get somethin’,but there ain’t no free.” terry adams, nrbq…this is a gamblers market, not an investors market, if there ever was one?the question is this.. is the economy expanding or is it contracting, deflating?the answer seems to be deflating. if that is true then everything will become smaller, shorter and changes will occur faster. peaks will come faster and be shorter, levels will not occur. trends will be down with head fakes that look like expansion or recovery. a sudden cliff could appear at any moment and everything could fall into it.don’t be fooled. the bottom will be around long enough.the market masters are milking it on the way down.but then there is the issue of bailout money. this is the magicians sleeve or hat. where the rabbit is, but then is not?or vice a versa.. the thing that gives creedence to the head fake.don’t be fooled.keep in mind i am in no position to give you, or anyone else,financial advice. roubini is never wrong, he just has an italian accent..i ask, how can a market function, and for how long, on government handouts? what exactly is the point here? it seems monymoronic somehow.

CNBC:Morgan Stanley Chief Executive John Mack told employees on Monday he would not get a bonus for a second straight year and announced compensation changes designed to more closely link pay with the bank’s long-term performance.Bonus for what???Do these guys deserve a bonus?yeh. Printed money bonus. Madness,.

I do not think this is the bottom. It seems logical to me that the bottom is around 7,000 or lower. But if the rest of the world behaves as if it is the bottom then what I think doesn’t matter and I am left in the dust of their irrationality.Maybe the promise of stimulus is the new opiate of the masses.

CNN”Small banks want their bailoutIndustry giants like Citigroup have eaten up a big chunk of the money set aside for the financial rescue plan. Now, community banks hope to get some crumbs.”I want my bailout!!!Give me money!

g, roubini has an italian accent but when he says the v train has left the station and we are looking at a u shaped recession if not worse i believe him. note. he said the tremendous stimulus was necessary to avoid depression , L shaped.i do remember him saying that it would be a mistake to monetize the bailout stuff though, and that may be in the mix now. so, either way, left the station is left the station.opiate of the masses, yes. promises, gambling and prostitution. but.. there ain’t no free.

Its easy – look at the Financlal medias ‘reasons’ for the market rally. If the rally is because of:- a bailout- a stimulusIt means that it is just a herd-like rush to the latest rumour, an attempt to cash in on some temporary uptrend generated entirely by governments trying to step in to ‘save’ it.I have said before that if a company has received a government bailout to survive, it should no longer be traded on the ‘free’ market. In this case our tax dollars or Fed promises have only served to enrich speculators. We are doing nothing more than financing a casino game.When some fundamentals start to turn there might be a real uptrend. But no fundamental has turned for a long time, except sharply downward.

Yea it’s called a higher capital gains tax and a lower corporate tax so billionaires are motivated to create companies that employ people- isn’t it kind of like duh? The problem is that the do nothing worthless wall street bankers/insurance companies want that money.

Here comes the bankruptcies higher unemployment and the ensuing collapsing bond market and derivatives. Spreads reaching the moon as the economy goes to sleep.Tried to save my house today the bank laughed at me said their investors deserved to be paid, they’re going to lose 150k and they offered no deal what so ever to me-Wells fargo. The foreclosure bailouts are not really happening it’s all been window dressing it’s hard for a sensible person to understand why a lender would accept such huge losses and offer current homeowner nothing at all or laughable loan modifications.

And in another development – the stimulus package and the “Buy American” provision – makes perfect sense but it is protectionist and history suggests that protectionism will prolong the downturn (e.g. protectionism begets protectionism) – Add that to Obama’s protectionist sentiments (and human nature) and you probably should factor protectionism into any “recovery” scenario -this is all going to end very badly in the coming few quarters and years

What I find funny is the very same people who idealize and talk about “free markets”, self actualization, self-reliance, globalization, capitalism, low taxes etc. all right wing stuff are always the very last ones to want to talk about giving up inheritances. It’s called speaking out of both sides of your mouth.

Great piece about the role of bloggers in this crisis:Snip…Though it’s still unclear how much credit the blogs can take for shaping Washington’s response to the crisis, it’s already evident that policy makers charged with monitoring and fixing the markets are no longer operating alone. A fast-moving, highly informed economics blogosphere now tracks and critiques their every move. The result is that this may be the first national crisis to be hashed out by experts in full public view. The blogs offer a rolling crash course in economics as authoritative as any textbook, but far more accessible. It’s a conversation that’s simultaneously esoteric and irreverent, combining technical discussions of liquidity traps and yield curves with profane putdowns and heckling headlines. In the process, the bloggers have helped to democratize policy making, throwing open the doors on the messy business of everything from declaring a recession to structuring the most expensive government bailout in history.SnipRead the whole thing – it is the last article at this link: TAE

Well, my outrage was communicated to congress for the WS bailout (actually, it was there for Bear Sterns, F&F, AIG, and so forth), fat lot of good it did. I have no idea what they think they’re doing now–personally, it looks like a rendition of bread & circus..circus = automaker spectaclebread = another stimulus

I don’t see how history suggests any such thing. The history that I see is that all of America’s jobs have been outsourced oversees and the only jobs here are counting Chinese people’s money. Not a sustainable system.

The sad reality is that the President needs to remind ordinary Americans to turn their freakin’ lights off at home, at work, at school. How did we get to this point?! Looking out my living room window I’d say Florida uses an obscene amount of dirty coal to fuel xmas lights! Huge spotlights on fascades, and security lights to go off every time an armadillo ambles by eating insects covered with pesticides from the lawns (lawns which take up 50% of Hillsborough County’s annual water usage). Pooh-pooh Obama’s changing of the light bulbs all you like, but he’s not doing it to impress angry libertarian geniuses such as yourself. Thankfully that’s a small demographic. As are the minimum wage government employee janitors falling off ladders trying to change bulbs in the middle of the night. Saving our ecosystem means changing the habits of impressionable simpleminded folks that vastly outnumber the crusty carpers and cynics. There is a bigger picture here. Take a stab at rising to it.

Last time I checked, in order to make a building truly energy efficient, you need to replace single pane glass with insulated, double paned windows, low e, argon filled windows and make sure the buildings themselves are insulated properly. While light bulbs may help, changing a heating system without changing the windows will be another big waste of taxpayer money. If you’re going to do something, please do it right.What Obama is proposing only helps low wage earners who for the most part are not educated. What does he plan to do for WHITE COLLAR WORKERS whose jobs have been eliminated?

“The American people will have to fight if they want back their Republic — and pay the price.” How do you expect the American people to fight? Will it be riots in the street? Revolution? Shotguns? Hiring illegal workers? What?While Helicopter Ben continues to print money hoping to re-inflate the economy, the rest of the world is flocking to the US Dollar because we are still perceived as a safe haven — even in this environment. Can anyone trust the Chinese government with their money? Russia? Europe? The euro is a new, untested currency. I suspect that it may not work when western europe gets sick and tired of bailing out and subsidizing the zombified economies of their eastern and southern european members.China is growing its economy with the roots of capitalism that America uprooted. But it cannot grow their economy at the rate it has been growing without world support for their products. And it is still run by communists — which means everything can be nationalized whenever they wish.

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Richard has published papers on wages policy, the taxation of financial arrangements and macroeconomic issues in Pacific island countries. Views expressed in these articles are his own and may not be shared by his employing agency. He is the author of How to Solve the European Economic Crisis: Challenging orthodoxy and creating new policy paradigms

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